A majority of banks in Bangladesh, including some Shariah-based ones, are facing difficulties to run their activities due to a liquidity crisis, according to industry people.

The liquidity crunch deepened further as the central bank recently raised the policy rate to tackle ongoing inflationary pressure in the country.

As such, these lenders are now dependent on the call money market, a short-term money market, and Bangladesh Bank to secure funds for meeting their payment obligations.

The average overnight call money rate stood at 7.47 percent yesterday, the highest in the last several years, as per the latest data of Bangladesh Bank.

The call money rate stood at 6.44 percent on September 16.

The average call money rate crossed the 7 percent mark on October 5, when the banking regulator raised the policy rate by 75 basis points to 7.25 percent to step up its fight against inflation.

This is the sharpest pace at which the policy rate has been increased in the last decade while it was the seventh hike in the past 18 months as consumer prices have remained at an elevated level.

Average inflation rose 9.63 percent in September, way above the government's target of 6 percent for the current fiscal year.

However, the banking sector has been facing a tight liquidity situation for the past year due to multiple factors.

This includes the high number of non-performing loans (NPLs), volatility in the foreign currency market, and customers' lack of trust in some Sharia-based banks.

Now, a growing number of banks, including some Shariah-based lenders, are continuously taking liquidity support from the central bank despite the increased policy rate, also known as repo rate.

As of October 15, 20 banks and one non-bank financial institution took Tk 18,381 crore under the repo facility, standing lending facility, liquidity support facility and Islamic banks liquidity facility to meet their liquidity shortage.

Mirza Ellias Uddin Ahmed, managing director of Jamuna Bank, told The Daily Star it is true that the liquidity situation is tight at present due to the central bank intervention aiming to curb inflation.

However, he said there is no other option at the moment as inflation has adversely impacted people's livelihood.

"Now, some banks are facing liquidity shortage, but this stress is needed for tackling inflation," he added.

Ahmed also said there is demand for loans, but banks are adopting a go-slow strategy when it comes to disbursals as NPLs have increased at an alarming rate.

NPLs in the banking sector hit a record high in June as the withdrawal of a relaxed central bank policy, slowdown in business sales and deliberate non-payments pushed up the volume to Tk 156,039 crore, central bank data shows.

This was the highest amount of NPLs in the country's history, with the previous high of Tk 134,396 crore recorded in the third quarter of last year.

Ahmed said the bad loans may rise further in the coming days because interest rates on lending have been continuously rising since the withdrawal of the interest rate cap.

The central bank withdrew the lending rate cap in June and introduced a new interest rate regime to meet conditions attached to the International Monetary Fund's $4.7 billion loan.

As per Bangladesh Bank's new formula, banks can impose a 3.5 percent margin on the six-month moving average rate of treasury bills, abbreviated as SMART.

Slow growth in private sector credit also reflects the banks' go-slow strategy in disbursing loans.

In August, private sector credit growth was 9.75 percent year-on-year whereas it was 9.82 percent in the preceding month, shows central bank data.

The August figure was the lowest since October 2021, when it stood at 9.44 percent.

It was also 1.15 percentage points lower than the central bank's target of 10.90 percent for the first half of fiscal year 2023-24.

A senior official of Bangladesh Bank said volatility in the foreign exchange market is one of the main reasons for the tight liquidity situation in the banking sector.

Higher import bills against moderate export and remittance earnings have caused the slide in foreign currency reserves, sending the US dollar rate to a record high amid a shortage of the greenback.

The central bank has been selling US dollars to banks from its reserves for the last two years in exchange of taka, deepening the liquidity crunch, the central bank official added.

Mohammad Ali, managing director and CEO of Pubali Bank, told The Daily Star that the central bank's recent move to raise the policy rate further intensified the liquidity shortage.

Besides, some Sharia-based banks and state-run banks have been facing a liquidity shortage for the last few months, which impacted the overall banking sector's liquidity, he added.

Shariah-compliant banks have been bearing the brunt of the liquidity crisis ever since loan irregularities in the sector made headlines, prompting some borrowers to withdraw their funds, industry insiders said.

Echoing the same, Emranul Huq, managing director of Dhaka Bank, said money circulation in the banking sector has reduced mainly due to the large number of bad loans.

"A large portion of money has left the market because of the growing number of defaulted loans," he said.

Besides, remittance inflow has fallen in the last two months, putting more pressure on the country's forex reserve and this ultimately squeezed money flow in the banking sector.

"So, the remittance flow will have to increase to meet the ongoing crisis," Huq added.