Liquidity crunch to hit industries

Liquidity crisis is likely to lead the country’s banking and industrial sectors to a looming disaster as it blocks import financing and private sector credit growth, economists and businessmen fear. They blame the central bank for failing to initiate proactive measures two years ago to check possible credit diversion to the capital market, which has resulted in a stock market catastrophe last year. They also came down heavily on the government for not stepping in to resolve the crisis.
“It is a terrible situation for the country’s industrial sector. I think a disaster is looming due to the banks’ reluctance to finance regular imports. They have also tightened policies on providing working capital and blocked credit to new private sector projects,” said Evince Group managing director Anwarul Alam Chowdhury Parvej Wednesday.
“High-ups of different banks told me that the situation emerged from liquidity crisis but the central bank’s policy restrictions on banks’ cash reserve ratio (CRR) and statutory liquidity ratio (SLR) are mainly responsible for their reluctance to approve credit,” he added.
A large volume of loans have become classified due to lack of credit support by banks as borrowers are unable to continue business, he said. “In the last few months, private sector credit worth Tk 1,068 crore has been classified. Of the amount, private banks account for Tk 756 crore. L/C (Letters of Credit) proposals for essential regular imports are piling up at the banks and are begging for attention. This has resulted in less industrial activities,” Parvej added.
A senior official at the foreign exchange department of National Bank Ltd said banks could not process L/Cs due to the central bank directives to bring down credit growth to 14 to 15 per cent from the high of 28 per cent during July-December 2010-11. During January-April, 2011, private sector credit growth declined to 2.64 per cent from 28 per cent during the first half, according to the central bank.
Meanwhile, president of Bangladesh Association of Exporters, Abdus Salam Murshedy, said the liquidity crisis might lead to a serious decline in the country’s overall exports.
“Banks have been offering 14 to 14.5 per cent interest rates for deposit and lending at 16 to 17 per cent with a service charge of 1 and 1.5 per cent, which proves to be costly for businessmen,” he pointed out and said the central bank’s decision to lift the ceiling on lending rate was mainly responsible for the unusual hike in interest rates.
Ziaul Hassan Siddiqui, deputy governor, Bangladesh Bank (BB), told The Independent that the policy restrictions by the central bank were needed to check inflation and restore discipline to the country’s financial sector.
Asked whether injecting money by the central bank into banks would ease the crisis, Siddiqui said many banks had no capacity to purchase money from the central bank right now.
“On the other hand, it would fuel inflation further,” he added. He, however, said that there were directives to banks to facilitate essential food imports.
Finance adviser to the former caretaker government, AB Mirza Azizul Islam, differs with Siddiqui’s opinion, saying that the monetary policy hadnever been an efficient tool to control inflation.
“I never believed that it is possible to control inflation by tweaking the monetary policy. Because, inflation is always driven by international prices,” he said and added that it might rise in the next fiscal due to the budget.
Islam further said the central bank should now think of short-term measures to tackle the liquidity crisis term since the next budget was due and the government would roll out its next monetary policy in mid or late August.
Former BB governor Dr Salehuddin Ahmed said: “Businesspersons are facing the reality and the central bank harps on policy restrictions.” There is no appropriate reflection of the central bank’s claim of having Tk 27,000 crore in excess liquidity, he added.
“It is a crisis-hour situation and the problem would intensify more in the next fiscal, if the government increases its borrowing from banks,” Ahmed said. The problem is that the central bank treats policy restrictions as only remedy to bring down credit growth to the normal levels, he said. The unusual credit growth during the first half of the current fiscal was misused and it resulted in the liquidity crisis, he added.
“Most of the money, which was released as loans for SMEs (small and medium enterprises) and the agriculture sector, was diverted to the capital market. The money cannot be recovered since the share prices are now very low,” he said.
Banks’ exposure to the capital market crossed 100 per cent in many cases over the mandatory 85 per cent advance-deposit ratio. And some banks still have excess exposure, Ahmed said.
“Sudden regulatory restriction does not act always. It sometimes brings about reverse results,” he said and added that the central bank should have smelt the liquidity crisis long before it happened. The former BB governor said banks now needed the central bank’s assistance to cope with the liquidity crisis. “They can’t escape a catastrophe if it happens,” he said.
Ahmed also underscored the need for reviewing the loan portfolios to find out if the money was recoverable within a minimum stipulated period.
“The quality of loan portfolios is not good. The central bank should intervene here and hold discussions with banks to address the problem,” he said.