Cash-strapped banks borrow record Tk13 lakh-cr from BB in FY23

To maintain stability in the country's financial market, the Bangladesh Bank extended a record Tk13.08 lakh crore in liquidity support to conventional banks during the fiscal 2022-23, marking a substantial seven-and-a-half-fold increase from the previous year's figures. In FY22, the figure was Tk1.76 lakh crore.

According to a document published by the central bank yesterday, this unprecedented support was necessitated by a tightening situation in the foreign exchange market.

To ease the impact on commercial banks, the Bangladesh Bank engaged in the sale of dollars, a move that, while addressing forex concerns, simultaneously exerted a contractionary effect on the liquidity of banks in the local currency, the Bangladesh Government Securities Report for FY2022-23 added.

Breaking down the colossal liquidity infusion, Tk611,656 crore was channelled through repo transactions, while Tk697,123 crore was provided to primary dealer banks through assured liquidity support (ALS).

A comparison  shows a significant uptick, as in the fiscal 2019-20, the highest support extended by the Bangladesh Bank through these two channels amounted to Tk554,791 crore.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, said commercial banks do not borrow as much from the central bank when the economic situation remains normal.

"I believe this effect is due to capping the lending interest rate at 9% in 2020," he said about the higher borrowing of banks from the central bank.

"Depositors lost interest in keeping their money in banks at low interest rates. As a result, banks had to borrow from the central bank to meet their daily needs," he added.

He also said the central bank has sold a large amount of dollars in the last few years, causing money to flow from the market to the Bangladesh Bank.

"Depositors lost interest in keeping their money in banks at low interest rates. As a result, banks had to borrow from the central bank to meet their daily needs."      Mustafizur Rahman, Distinguished Fellow, Centre for Policy Dialogue

The Bangladesh Bank acts as the seller, offering government securities (treasury bills and bonds) to banks and other financial institutions through auctions.

According to the Bangladesh Bank report, in FY23, the amount of ALS and repo transactions with the central bank significantly increased ‍compared to previous fiscal years,which contributed to this notable enhancement due to the tightening situation in the foreign exchange market.

"The Bangladesh Bank supported the commercial banks by selling dollars in the market. This might have a contractionary effect on the liquidity of the commercial banks in local currency, which caused a significant enhancement of repo transaction volume," the report said.

Repo is the central bank's short-term lending tool to banks through bank securities such as Treasury bills and bonds.

Why are the central bank's loans to banks increasing?

A senior official at the Bangladesh Bank said it is one of the sources of borrowing for banks. Banks needed massive dollar support in the FY23 to meet import liabilities. At that time, banks bought about $14 billion from the central bank, causing their liquidity crisis.

For this reason, fund support is given in large amounts through repo and ALS to reduce the liquidity crisis, he added.

For the past three years, the central bank has consistently sold dollars from reserves to banks. The sales amounted to $7.62 billion in FY22, $13.58 billion in FY23, and $6.7 billion till 15 January of the current fiscal year, beginning in July last year. Primarily, these dollars are allocated to cover the import bills of 5-6 types of products, including food, fuel, and fertilisers.

While announcing the new monetary policy on 17 January, Bangladesh Bank Governor Abdur Rouf Talukder said the dollar shortage is the main reason behind the liquidity crisis. The Bangladesh Bank sold $28.7 billion to banks in the last three years, through which Tk2.84 lakh crore was mopped up. But the same amount of money was not injected into the market, which created a liquidity crisis.

Moreover, the Bangladesh Bank has stopped money creation for government financing since August last year. As a result, the government has been borrowing from the banking system, creating liquidity pressure, said the governor.
 
Banks' excess liquidity and deposit growth have slowed

Hassan O Rashid, managing director at Prime Bank, told TBS, "The liquidity is mainly for buying dollars from the central bank and for mopping up excess liquidity by the Bangladesh Bank to contain inflation as part of contractionary monetary policy."

He said the attractive rates on Treasury bonds and bills offered by the government are another reason for banks' liquidity shortages.

Habibur Rahman, chief economist at the Bangladesh Bank, said last week that the excess liquidity of Islamic banks has decreased the most in the last one year.

In June 2022, excess liquidity in Islamic banks was Tk26,876 crore. But after a year, in June 2023, it came down to Tk11,630 crore. In November 2023, the excess liquidity of these banks further decreased to Tk5,430 crore.

According to the Bangladesh Bank report, in the last 11 years, the lowest growth in bank deposits has been recorded in 2022.

In 2022, deposits in banks increased by only 5.7%, compared to 10% in the previous year.

However, deposits grew by 16.08% in 2013 and 20.2% in the previous year.