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Banks’ liquidity crisis raises fear 

Published : Monday, 16 September, 2024 at 12:00 AM  Count : 519
Md Tariful Islam
Due to the severe liquidity crisis, most banks in Bangladesh are now heavily dependent on the call money market and the central bank for their operations. A liquidity crisis occurs when a bank is unable to provide funds to a customer, whether to withdraw their savings or to provide loans for investment. 

Currently, most banks, except for a few, are failing to maintain the necessary liquidity to meet customer demands. This situation is not only creating a lack of trust in the banking system but also putting the banks at significant risk. The liquidity crisis has been exacerbated by high levels of non-performing loans and poor governance in the banking and financial sectors. Although the interim government has already formed a banking commission to address these issues, which is a positive step, the challenges remain.

Several institutional challenges and regulatory weaknesses have made the banking sector more vulnerable. Factors such as politically motivated loan approvals, political influence in board member appointments, inadequate risk management, failure to meet international standards, weak financial oversight, loan rescheduling despite repayment defaults, loan write-offs to reduce tax burdens, and uncontrolled bad debts are some of the primary reasons behind the current problems in the banking sector.

Although one of the main functions of banks is to connect lenders and borrowers, they are also required to deposit a certain portion of customer deposits with the central bank to ensure the safety of depositors. In recent times, after various irregularities in the banking system came to light, many depositors have lost confidence in the system. As a result, deposit collection rates have decreased, and loan disbursement has been disrupted. Furthermore, since the onset of the country's unstable political situation, many influential individuals have withdrawn large sums of cash. Some anxious depositors are also withdrawing cash even when it is not immediately needed due to security concerns, further worsening the liquidity crisis.

To restore depositor confidence, the central bank has already increased the deposit insurance scheme coverage from BDT 100,000 to BDT 200,000. According to the Deposit Protection Act 2020, if a bank becomes insolvent, depositors can claim up to BDT 200,000 from the central bank, even if their deposit exceeds this amount.

To ease day-to-day operations, banks may rely on the central bank to print new money and supply it to them, which would, however, increase inflation. Instead, the central bank is considering alternatives to restore discipline in the financial sector. According to the governor of the central bank, 10 weak banks have been identified that have lost the ability to return depositors' money. In such cases, the governor has stated that banks that have become insolvent due to fraud and embezzlement may need to be merged with other banks to protect the interests of depositors.

To restore depositor confidence, the central bank has already increased the deposit insurance scheme coverage from BDT 100,000 to BDT 200,000. According to the Deposit Protection Act 2020, if a bank becomes insolvent, depositors can claim up to BDT 200,000 from the central bank, even if their deposit exceeds this amount.

Instead of declaring multiple banks bankrupt, merging struggling banks has been suggested, and the central bank has already taken initiatives to implement this under its supervision. It will take some time for the financial sector to recover from its current state of distress. To regain trust in the banking sector, steps have already been taken, including the restructuring of the boards of several banks, including some Shariah-based banks. Depositors expect the central bank to prioritize their interests while making all subsequent decisions to restore stability to the sector.

The writer is Lecturer  (Production Management & Markting) Nurul Amin Mozumder Degree College, Laksham, Cumilla



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