by Rahel Ahmed
Banks should foremost focus on liquidity management to prepare for the aftermath of the coronavirus pandemic.
The second priority should be improving operational efficiency of banks for reducing cost because business volume of the banking sector will fall significantly due to a worldwide economic crisis caused by the outbreak.
Initially, the Bangladesh Bank's measures such as cutting down repo rate and cash reserve ratio helped banks hold a comfortable liquidity position. But the sector may require further easing of regulatory requirements depending on how long the current shutdown prevails.
Cash holding tendency amid an economic crisis will hurt banks' deposit growth. Moreover, foreign currency earning sources like remittance and export will remain down.
Amid this situation, the implementation of government- announced stimulus packages and a borrowing tendency after the pandemic will put pressure on liquidity in the banking sector.
So, ensuring liquidity supply will be a greater challenge for banks.
Repo rate has been reduced aiming at making funds cheaper for banks. But the duration of repo should be extended. Currently, the maximum tenure of repo is 28 days, which can be extended to one year considering the current crisis.
Repo rate, also known as policy rate, is the central bank's lending rate for commercial banks.
Garment exports fell by 83.74 percent in the first 15 days of April as compared to the same period of the last year, according to data provided by the Bangladesh Garment Manufacturers and Exporters Association.
Remittance, the lone economic variable that had been keeping the foreign exchange market propped up amid falling export earnings, also tumbled by 11.77 percent year-on-year in March this year as the coronavirus hit the global labour market.
Credit growth to the private sector continued to slide for several months reaching 9.1 percent in February, keeping banks awash with excess liquidity.
Although banks were in a comfortable position in terms of liquidity, the Bangladesh Bank in two phases cut cash reserve ratio from 5.50 percent to 4 percent and repo rate to 5.25 percent from 6 percent to tackle the deposit withdrawal pressure amid the shutdown, as well as the implementation of the Tk72,750-crore stimulus package.
Though the banking sector has the capacity to implement the stimulus package, small enterprises are likely to be deprived of the facility.
Small business will be affected more during the shutdown. The risk of recovering their business is also high. However, as banks have been given the full responsibility to recover loans, they will not lend to high-risk clients – small businesses.
In this circumstance, the Bangladesh Bank can provide credit guarantee against the stimulus package of Tk20,000 crore announced for micro and small enterprises.
If the central bank gives guarantee of at least 70 to 80 percent of credit, then banks will be interested in giving loans to small businesses.
The Bangladesh Bank has set strict conditions for the repayment of loans taken out by small enterprises, which will be difficult for them to comply with. This will create a high risk of defaulting.
For instance, if the loan amount exceeds the authorised limit due to imposed interest, clients will have to adjust the excess amount of loan within five days. It will be difficult for a small enterprise to adjust excess loan amounts within this period of time.
Rahel Ahmed is the general secretary of Association of Bankers, Bangladesh (ABB)