Cash-strapped banks fail to maintain emergency fund

Banks strapped for cash are now struggling to maintain the mandatory daily cash reserve ratio (CRR) with the Bangladesh Bank, meaning they won't have cash readily available if customers want their deposits back.

Although the lending rate cap is 9%, some banks are aggressively borrowing money at more than that from other banks for the short term to mitigate their daily cash maintenance requirement.

According to bankers, the Bangladesh Bank recently verbally instructed banks to keep the interest rate for inter-bank operations at 9% in line with the lending rate cap.

The CRR is the percentage of total deposits a bank must have in cash to operate risk-free.

The Bangladesh Bank reduced the CRR to 4% from 5% in April 2020 to increase money flow in the market during the pandemic.

In December, seven banks, including one state-owned and six private commercial banks, failed to maintain the required CRR, each running risky operations.

The banks are – Janata Bank, National Bank, First Security Islami Bank, Islami Bank, Social Islami Bank, ICB Islamic Bank and Union Bank.

According to bank sources, six more banks are on the brink of a CRR shortage as they had a ratio surplus of less than Tk10 crore.

Banks can't lend the CRR money to corporates or individual borrowers and it can't be used for investment purposes either. Banks also don't earn any interest on the money.

The CRR ensures fund security in emergencies, ensuring the cash is readily available if customers want their deposits back.

If any bank fails to maintain the required CRR, the Bangladesh Bank fines the lender at the bank rate of 4%, along with an additional 4%, bringing the total to 9% on the total amount short daily.

How troubled banks are aggressively borrowing

The scam-hit private commercial National Bank borrowed money from Bank Asia at 9.5% in December through inter-bank repo operation, although the lending rate was set at 9%.

Repos and reverse repos are transactions in which a borrower agrees to sell securities to a lender and then to repurchase the same or similar securities after a specified time at a given price, including the interest, at an agreed-upon rate.

National Bank also borrowed from other banks at above 9% rate throughout December last year to maintain its CRR shortfall.

However, in October, it had a surplus CRR of above Tk1,500 crore, according to the bank's statement.

The high borrowing rate of National Bank took the average interbank rate to nearly 8% in December 2022 when the average rate in the call money market – where banks make overnight borrowings – was 6%, according to central bank data.

Most Shariah-based banks, which were in huge cash surplus in October, showed a CRR shortfall running risky operations.

The total CRR maintenance of such banks was a surplus of over Tk6,000 crore in October, which turned into a shortfall of nearly Tk7,500 crore in December last year, according to their bank statements.

The CRR shortfall of these banks intensified the liquidity crunch in the whole banking system, according to industry insiders.

Considering the situation, the Bangladesh Bank in December introduced liquidity support to cash-strapped Shariah-based banks for the first time.

These banks have seen huge deposit withdrawal pressure since November after the loan scandal of Islami Bank came to light.

As a result, circulating currency outside banks surged from 14% in January last year to nearly 22% in November, according to Bangladesh Bank data.

Huge cash holdings also intensified the liquidity crisis in the whole banking system.

The Bangladesh Bank, in its latest monetary policy statement for the next six months of the current fiscal year, showed that excess cash in the banking sector declined sharply – by Tk20,285 crore – in just five months to Tk6,591 crore in November last.

Islamic banks saw their excess cash falling to Tk646 crore in November from nearly Tk16,000 crore in June last year.

How Cenbank is managing liquidity crisis

The Bangladesh Bank mopped up Tk80,000 crore in July-December last year by selling $8 billion to banks from the forex reserve, creating a liquidity crisis in the market.

Then, the central bank started to issue new money through balance sheet expansion to supply money to the government for budgetary expenditure instead of taking money from commercial banks.

The Bangladesh Bank issued Tk68,000 crore in July-December for budget support, reducing pressure on banks. Moreover, the central bank is supplying liquidity to banks through repo.

At the beginning of December, the central bank supplied nearly Tk20,000 crore per a day to commercial banks through repo which crossed Tk30,000 crore at the end of the month, reflecting the severe liquidity crisis in the market.