The liquidity crisis in the banking sector has emerged due to a mismatch between banks’ assets and liabilities. This issue is particularly evident in Islamic banks, where a significant portion of their increased assets consists of non-performing loans (NPLs) with low recovery prospects. These bad loans have limited the flow of funds into banks, creating a severe liquidity crunch.
Additionally, the outflow of laundered money and the tendency to hold money outside the banking system have exacerbated the crisis.
These challenges have pushed up interest rates in the interbank money market, compelling banks to charge higher interest on loans. As of September, the volume of NPLs in the banking sector reached approximately BDT 2.85 trillion, accounting for nearly 17% of total outstanding loans.
Due to the immobilisation of funds in NPLs, many banks, especially Islamic banks, are struggling to meet depositors’ withdrawal demands or issue new loans. This has hindered their daily operations and curtailed opportunities to extend credit.
The case for bank mergers
In reality, the country has more banks than necessary. A structured auditing process could identify banks that should be merged to optimise resources.
However, bank mergers are a time-consuming process, requiring at least two years for proper implementation. While the previous government initiated merger discussions, the lack of a well-thought-out plan prevented success. If the current government considers merging banks, a dedicated task force should be established to oversee the process.
Policy oversight and reform
During the previous administration, several business entities secured loans beyond permissible limits by bypassing regulations. The central bank must strictly enforce exposure limits to ensure good governance.
Borrowers who secured loans exceeding their financial capabilities are now struggling to repay interest. Relaxation of single-borrower exposure limits should be granted only for importing essential Ramadan goods or for the power sector, which is vital for the country’s infrastructure and economy.
The banking sector must adopt prudent policies, ensure governance, and address systemic inefficiencies to navigate the current liquidity crisis effectively. Without immediate reforms, the challenges posed by NPLs and poor regulatory practices will continue to undermine the sector’s stability.
The author of this article is a former Chairman of the Association of Bankers, Bangladesh, and a former Managing Director of Mutual Trust Bank.
BDST: 1218 HRS, DEC 11, 2024
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