Bangladesh's money market has been volatile due to the deepening problems in the banking sector, analysts said yesterday.
The problems include: liquidity crisis, non-performing loans, growing gap between lending and deposit growth, widening current account deficit, a distortion in the interest rate market and a lack of skilled manpower.
The observations came at a meeting on the prevailing money market situation and the way forward. The Institute of Chartered Accountants of Bangladesh organised the event at its auditorium in the capital.
The Bangladesh Bank could have been more proactive in bringing back stability in the banking sector, said Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue.
The central bank should adopt a zero tolerance policy to rescheduling default loans by bypassing its regulations as many influential borrowers frequently enjoy the facility, he said.
It will also have to strengthen its monitoring on the banking sector to restore corporate governance.
It is not possible to bring down the lending rate to single digit if more than 10 percent of the outstanding loans are non-performing, he said.
The high classified loans indicate that the banks have less money, meaning their cost of fund is high, said Rahman, who was the chief guest of the event.
At the end of March, the total default loans in the banking sector stood at Tk 88,589 crore, up from Tk 74,303 crore at the end of December last year, according to data from the central bank.
The sponsors of banks have recently taken a decision not to charge more than 6 percent interest on fixed deposit schemes. At the same time, the government has targeted to contain inflation within six percent.
“The depositors will not get anything from their savings in banks because of the same rate between inflation and deposit,” he added.
Banks do not have adequate manpower to operate effectively, said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a platform of the chief executive officers of private banks.
“The number of 57 banks is excessive considering the country's economic volume. There is now a high competition among banks to manage profit.”
Bank management has to ensure profit in line with the target set by the board, said Rahman, also the managing director of Dhaka Bank.
State-run banks failed to meet the Basel III requirement for capital to risk-weighted asset ratio of 10 percent last year thanks to having more than 20 percent non-performing loans, said Dewan Nurul Islam, president of ICAB.
Towards the end of last year the liquidity situation of the majority of the banks started to deteriorate, which metastasised into a liquidity crunch in January this year.
“The sudden shift in the scenario, from a position of excess liquidity to a liquidity crunch, triggers the questions where the money has actually gone,” Islam added.
All banks would have to implement the Basel III requirements by 2019 in accordance with the central bank's instruction, said Md Mahbubur Rahman, deputy managing director of City Bank.
A higher loan growth (18.4 percent) than the deposit growth (10.20 percent) drove up the private banks' loan-deposit ratio to 85.80 percent in March this year, said Abdul Kader Joaddar, deputy managing director of Brac Bank.
“People have been parking their funds in national savings instruments instead of banks' products because of higher interest rates.”
Subsequently, he urged the authorities to lower the interest rate on savings tools in line with the rates offered by banks.
The unrest in the money market had emerged after the central bank's instruction of lowering the loan-deposit ratio by June, said Sajjadur Rahman, business editor of The Daily Star.
“The central bank should have considered that all banks' capacities are not the same.” Later, the BB's about turn on the issue, bowing down to the pressure of private banks, has aggravated the situation, he added.
The depreciation of taka against the dollar may ward off foreign investors from the capital market, said M Habibur Rahman Chowdhury, DMD of Prime Bank.