Banks are now offering double-digit interest rates for deposits in a desperate attempt to prop up their liquidity base amid high default loans and heavy bank borrowing by the government.
“The majority of the banks are forced to take deposits at 10 percent or more to tackle their liquidity crunch,” said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a platform of private banks' chief executives.
A large amount of funds in the form of non-performing loans is now stuck with defaulters -- hiking the banks' cost of funds.
At the end of 2018 the total amount of non-performing loans in the banking system stood at Tk 93,911 crore, up 26.38 percent from a year earlier.
“This has finally pushed the interest rate on deposit products past the 10 percent-mark,” he added.
But in April last year, sponsors of private banks had fixed the interest rate for deposits at 6 percent and for lending at 9 percent after bagging a set of facilities from both the central bank and the government.
But, they failed to keep their word amid the rising liquidity crisis.
As of January, the excess liquidity in banks stood at Tk 67,642 crore, down 11.45 percent from a month earlier and 13 percent year-on-year, according to data from the central bank.
Amid the backdrop, in a baffling move the government last month announced an easy loan rescheduling and loan classification package for defaulters.
From May 1, defaulters will be allowed to reschedule their loans for 12 years after furnishing 2 percent down payment. At present, defaulters can reschedule their loans for at most 3 years by providing 10 to 15 percent down payment.
Both small and large borrowers will be able to get the rescheduling facility and a 9 percent simple interest formula instead of existing compound formula will be applied -- which is lower than the current market rate.
“Some borrowers have recently stopped repaying their monthly credit instalments after hearing that the central bank will offer different types of facilities to defaulters,” said Rahman, also the managing director of Dhaka Bank.
In another helping hand to the defaulters, the central bank is set to relax the country's loan classification rules, which were tightened in 2012 to comply with global standards. As per the rules, loans overdue for three, six and nine months are now classified as sub-standard, doubtful and bad respectively.
But now, the timeline has been pushed by three months for each category, meaning non-payment for six months would lead to the loan being classified sub-standard. The loan would turn doubtful after non-payment for nine months and bad after 12 months.
The central bank's move has also encouraged a section of borrowers but it has widened the woes of lenders, Rahman said.
Banks are also providing funds for implementation of the government's mega infrastructure projects on a priority basis, which has also hit the liquidity base of banks, according to the Dhaka Bank MD.
To exacerbate matters, the government's borrowing from banking sources is on the rise, he said.
Between July 2018 and January 2019, the government's bank borrowing stood at Tk 4,451 crore. In contrast, a year earlier it did not borrowed any fund but repaid Tk 15,030 crore to adjust its previous lending.
The higher interest rate on government savings tools than banks' deposit products is another reason for the liquidity crisis, Rahman said.
“Many banks have even stopped lending to fresh clients to mitigate the liquidity crisis,” he added.
MA Halim Chowdhury, managing director of Pubali Bank, echoed the same. “A number of banks are in liquidity crisis,” he added.
The ongoing liquidity crisis might become worse in the months ahead if immediate measures are not taken, said Ahsan H Mansur, executive director of the Policy Research Institute.
The government will have to increase its revenue to avoid borrowing from both the central banks and savings certificates.
“And the latest central bank move to relax the loan classification rules has created a moral hazard as it has encouraged many borrowers to not repay their loans on time.”