Liquidity crisis: reasons and ways to overcome

After having excess liquidity for quite a long time, banks have been facing increasingly more demand for loans from the private sector since December last year.

In this situation, a few banks have exceeded the allowable loan-deposit ratio (LDR) of 85 percent. As it is a violation of one of the macro-prudential policies, the Bangladesh Bank (BB) took action against these banks. The BB has advised banks to reduce the LDR to 83.5 percent by December 2018.

It will compel banks to retain and collect a higher amount of deposit to maintain their current level of loans and advances or increase thereof. Apparently, it will augment the current liquidity crisis of banks. As a result, some banks and financial institutions are now trying to collect more funds by applying traditional strategy i.e. increasing the rate of interest.

Is this shortage of liquidity in banks unexpected? I may not be wrong if I say that it is expected. A country where growth rate is 7.28 percent needs swelling amount of money to fulfil the necessities of a gigantic number of transactions at the consumer, trader and producer levels.

For example, capital goods that recorded a high growth rate of 11.2 percent to $20.119 billion in 2017 from $18.092 billion in 2016 are clearly indicating an upcoming bullish trend of the private sector.

Additionally, if public investment increases in future at the current rate, government borrowing from the banking sector may increase. This will further fuel the current liquidity crisis.

Apart from this, during the last two years, household savers have parked their maximum possible savings in savings schemes instead of banks as the banks were paying a lower interest rate on deposits and sometimes even less than the inflation rate.

Additionally, spiralling non-performing loans, increasing black money, trapping money in the share market, and siphoning money outside of the country might be the possible causes behind the current liquidity crisis. 

In this situation, strategies, like giving a strong drive to collect idle money from savers and bring earnings of the non-resident Bangladeshi (NRBs) with financial and non-financial benefits, and stopping loopholes of siphoning money can improve the scenario.

A good chunk of money owned by garment workers is not usually coming to the banking sector. Although it is tiny at the individual level, it may be huge altogether. Banks can form a tailored one-time or recurring deposit product by offering financial and non-financial benefits to this section of the society.

In case of financial benefits, banks may consider a rational amount of interest, extend secured overdraft facility and give flexible time in depositing money.

Non-financial benefits can be awarding a prize to kids of garment depositors for academic and extra curriculum achievements, making available medical treatment at a discounted rate and offering easy collection procedures.

Adding insurance facility with deposit scheme will enhance the sense of financial security to such savers. For example, the nominee of the workers of Rana Plaza could have got some financial benefits, had the deceased workers got the scope to open a deposit account with insurance facility. These non-financial benefits may create interest among depositors to put money in banks.

Almost 9.05 million Bangladeshi nationals working abroad are playing an essential role in our economy. In 2017, they sent $12.59 billion which has strengthened our current account balance. We can increase this amount manifold through designing appropriate products. Although we have Wage Earner Development Bonds, these are not well familiar to the NRBs. Commercial banks can design a few deposit products by understanding their requirements.

Banks can create a deposit product akin to a pension scheme and can also form investment-linked deposit products by pledging to invest the deposited amount of NRBs in real and fixed-income bearing assets.

Many banks do not have suitable deposit products that take into account the requirements of aged persons. A deposit product with medical services, insurance facility, a scope for priority service and assistance in submitting the tax return to the National Board of Revenue may attract many aged persons to keep their idle money in banks.

Another important source could be the women population as most of them are housewives. They hold a huge amount of idle money in their house as they are not mostly bankable.

Banks can come forward to bring this money by designing appropriate savings products. In designing products for this section of the society, safety, conformability, flexibility, objectivity, and loan facility are required to be contemplated.

Apart from these, banks can introduce deposit products for different types of marginal people by offering financial and non–financial benefits. A large amount of money is being held by religious organisations like mosque, temples, and churches in their own possession. This money may also be a channel to banks if appropriate products can be structured considering the religious sentiment.

We are still habituated to using the printed money. As a result, each person is holding money in their wallet which can be massive in total. The usage of plastic money can reduce the amount of money in the wallet and increase the volume of money in the banking sector.

However, reaching out the appropriate segment of the society is a key challenge. Convenient branches, agent banking, mobile banking, internet banking, and strong websites with appropriate marketing and sales activities can be used to reach new households to collect core deposits.

Of course, customer confidence in banks and financial institutions along with relationship package that provides better rates, fewer nuisance fees, and a higher level of service also matters.

Sourcing funds by issuing bonds is a common phenomenon in banks in different countries. Banks can open a new wing to source funds through issuing bonds, which will cut reliance on deposits.

It is believed that collective and prudent initiatives will help banks and financial institutions bring unutilised money into the financial sector, supplying much-needed lubricants to our economy.

The writer is professor and director for research, development and consultancy at the Bangladesh Institute of Bank Management.