Liquidity crunch looms as imports, credit demand on the rise

Banks will come under a liquidity crunch within three to six months due to an escalation of import financing and a rising demand for loans from businesses as the economy returns to normalcy, warned several top executives yesterday. 

The excess liquidity had stayed at historically high levels as of June because of the economic slowdown caused by the coronavirus pandemic, but the trend has already begun reversing.

Five managing directors of banks yesterday said that both import financing and private sector credit growth would rise exponentially in the months ahead, which will subsequently create a liquidity crunch.

Some banks are already feeling the pinch of the liquidity shortage, they said.

Surplus funds in the banking industry stood at Tk 219,600 crore as of September, down from 5 per cent a month ago, according to data from the Bangladesh Bank.

In June, the excess liquidity rose to a record high of Tk 231,711 crore. This compelled the central bank to revive the Bangladesh Bill, an instrument used to mop up excess liquidity, in August.

But, the situation is completely different now owing mainly to the excessive growth of imports.

The settlement of letters of credit (LCs), also known as actual import payments, swelled 47 per cent year-on-year to $17.04 billion between July and September.

Imports are expected to rise further in the coming months.

The pickup in imports has pushed the private sector credit growth.

The credit growth stood at 8.77 per cent in September, up from 8.42 per cent a month earlier.

The credit growth had decelerated to 7.52 per cent in the last fiscal year, the lowest in at least 28 years.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that the liquidity stress had already become visible in some banks, but this would spread throughout the entire banking system within the next couple of months.

"Businesses have almost returned to the pre-pandemic level as the economy has reopened."

Against the backdrop, the interest rates on Treasury bills and T-bonds are on the rise.

The yield on the 10-year Treasury bond stood at 6.80 per cent in October compared to 5.63 per cent in the same month a year ago.

The government borrows funds by issuing the securities, and banks chiefly provide the funds by taking part in auctions.

Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank, said that many businesses were now availing of working capital to speed up productions, putting a positive impact on the credit growth.

In addition, the disbursement of term loans, whose repayment tenures are more than one year, is rising, a sign of fresh industrial investment, he said.

He reckoned that the banking sector would face liquidity stress within six months.

Emranul Huq, managing director of Dhaka Bank, however, thinks that the liquidity shortage might hit the banking sector within the next three months.

"We are lending heavily now in the form of post-import financing to help importers run businesses smoothly."

"The private sector credit growth will surpass the expectation in the current fiscal year," said Md Arfan Ali, managing director of Bank Asia.

The central bank has targeted a 14.80-per cent private sector credit expansion in the current fiscal year.

Many banks are in a difficult situation to settle LCs, so they have rushed to the central bank to purchase US dollars.

Lenders have to buy the greenback in exchange for the taka, which is playing a role in mopping up the local currency, he said.

The injection of US dollars to fulfil the demand of businesses will exacerbate the liquidity stress.

Ali, however, said that the ongoing credit demand was the indication of the rebound in economic activity, and the situation should be tackled efficiently.

The BB has sold about $1.38 billion worth of US dollars between July 1 and October 27 to tackle the depreciation of the taka against the dollar.

The average interbank exchange rate was Tk 85.66 per USD on October 31, up from Tk 84.80 a year ago.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, said if the productive sector performed well, excess or shortage of liquidity would not be a matter of concern.

Dhaka Bank's Huq said commodity prices in the global market had increased sharply, bringing a negative effect on the import payments.