Liquidity management to be a big challenge in post-pandemic period

Liquidity management in the banking sector will become a challenging task in the near future due to the coronavirus fallout, said Mominul Islam, managing director of IPDC Finance.

Besides, the non-bank financial institutions also struggled with funding for the past two years while the liquidation of the People's Leasing Financial Services company has only intensified the sector's woes.

Due to the current crisis, government borrowing from the banking sector will rise while deposits may drop along with loan repayment, Islam said during an interview with The Daily Star last week.

He shed light on the challenges and opportunities the financial sector may face in the upcoming days.

"Liquidity will not be a big problem right now thanks to steps taken by Bangladesh Bank," said the top official of IPDC Finance, the country's first private non-bank financial institution established in 1981.

One of the steps was a cut in the cash reserve ratio (CRR) and repo rate for financial institutions.

The banking regulator reduced the CRR for all financial institutions by 100 basis points to 4 per cent while the repo rate was shrunken by 50 basis points to 5.25 per cent.

In the upcoming days, private sector credit demand will rise alongside the public sector demand, he said.

Since revenue collection by the National Board of Revenue has not yet reached its target level, it will create more credit demand from the government's side.

"So, the liquidity supply could deteriorate in the process," Islam added.

Considering the situation, the Bangladesh Leasing and Finance Companies Association (BLFCA) has asked the government to provide the sector with a special refinancing scheme of Tk 10,000 crore at bank rates for the next 10 years.

"If we get these funds, then our liquidity shortage will be solved," said Islam, who is also president of BLFCA.

The country's financial sector is also seriously lacking in other ways due to the absence of an effective bond market. If a proper bond market is not established, then it is impossible to save the industry from liquidity shortages in the long run.

"Now, lenders are financing term loans with short term deposits, which is not a sustainable option," the managing director said.

However, it brings hope that the finance minister and recently appointed chairman of Bangladesh Securities and Exchange Commission have already emphasized on the need to develop a bond market.

However, there do not seem to be any such measures included in the proposed budget for fiscal 2020-21.

Although the government claimed to have reduced taxes in the new budget, there was no clause for advance income tax on bond owners, which was proposed this year.

"It will deter the bond market's development rather than help it go forward," said Islam.

Another step the government has taken is to make the tax applicable on commissions instead of transactions.

"This is a good initiative but the impact is very marginal," the managing director continued. "We expected the government to exempt tax for a time being or at least decrease the rate to help develop the market.

However, the government issued a new tax for individual and corporate investors on the purchase of zero coupon bonds.

This is a big blow to the development of the bond market, he added.

Making matters worse is that non-performing loans (NPL) is another challenge faced by the financial sector, which is undergoing a transition period due to the ongoing coronavirus pandemic.

However, the level of NPLs in Bangladesh can be considered to be abnormally high.

The government has already relaxed the fines on late payments for loans until June but it may extend the deadline considering the deteriorating Covid-19 situation.

To address the situation, banks should hold discussions with their customers to analyse the best way to manage NPL issues.

"We have to keep our customers alive as well since they are the lifeblood of our business," Islam said.

In order to do so, financial institutions should keep high fund provisions so that they can handle any liquidity issue in the coming days.

Banks will also have to be cautious when managing their expenditures as well so that unnecessary costs do not become a cause of capital erosion during such a time of crisis. Financial institutions will desperately need the money to regain their business after the pandemic comes to an end.

Investment in the country's healthcare industry could also increase as the coronavirus has proven that the sector is fragile and lacking funds. Likewise, the e-commerce sector will have an opportunity to grow as consumer behaviour has changed drastically in the past few months.

Digitization will also become another booming sector as many offices conduct all of their business-related activities online in an effort to keep their workers' safe from infection.

To help facilitate these opportunities, financial institutions need to keep an adequate supply of funds so that they do not need to ask for extra provisions in the coming years.

"At this time, we do not need to keep provisions thanks to policy support from the central bank. However, in the next few years, we will have to put an end to non-performing loans," Islam said.

So, if banks keep adequate provisions from now on, they will be able to help the economy recover fully after the end of the pandemic.

In response to a query, Islam said political influence or any other outside influences in money lending creates risk for the sector. This is because when a lender provides funds without conducting a proper assessment, it could lead to a default.

Banks that have strong corporate governance and honest shareholders do not face such problems but those that do, suffer greatly, he added.

About the IPDC's recent growth, Islam said the company took a new innovative business approach in 2015.

Before providing innovative loan, IPDC tried to minimise its non-performing loans, which gave a result, pulling it down from 37 per cent to 2 per cent during 2006-2014, he said.