Money market shows signs of stability – but depositor trust still shaky

Summary:

• The dollar rate and reserves have remained stable since regime change in August
• The forex market saw significant development due to robust remittance inflow
• Import expenditures continued to decline, while exports recorded positive growth
• Interbank transactions have resumed on the back of policy measures
• Some banks struggle to manage liquidity, while stronger ones see increased cash flow

The country's money market – both local and foreign – has shown signs of gradual improvement over the past three months under the interim government.

The dollar rate and reserves have remained stable, and interbank transactions have resumed, thanks to policy measures taken by the Bangladesh Bank.

However, depositor confidence remains shaky as nine weak banks are still not fully able to pay back money to their customers, according to market insiders.

Reconstruction of the boards of nine banks – seven of which were controlled by S Alam Group – has stopped further swindling of depositors' money and its laundering.

Now these banks have started to honour customer cheques on a limited scale, gradually helping to rebuild depositor confidence.

At the same time, the forex market saw significant development on the back of robust remittance inflow following the fall of Sheikh Hasina's 15-plus-year regime on 5 August amid a massive student-people upsurge.

Moreover, the Bangladesh Bank stopped day-to-day interference in the forex market, which has also helped ease rate fluctuations, according to bankers.

In August, the money market regulator set the remittance rate at a maximum of Tk120 in line with market demand, and it has remained stable as the rate gap with the informal market narrowed to Tk1-2 from over Tk10 previously.

Speaking with The Business Standard, Sheikh Mohammad Maroof, managing director of Dhaka Bank, said less interference by the central bank helped keep the rate stable. Additionally, the demand-driven rate encouraged remitters to send more remittances through the banking channel.

"Liquidity has improved in most banks, except for a few troubled ones, due to lower investment demand," he said. The senior banker added that while the money market crisis has eased gradually, investor confidence remains shaky due to political uncertainty.

According to bankers, most banks are lending at a maximum of 13%-14% while collecting deposits at rates above 10%.

Measures central bank took after regime change

The Bangladesh Bank has taken three major steps: it halted dollar sales from reserves, stopped liquidity support to troubled banks, and reconstructed the boards of nine weak banks.

The money market regulator has instructed banks to manage their letters of credit (LCs) from their own sources, and state-owned banks have been directed to collect dollars from the market for government LCs.

The dollar price was raised to Tk120, narrowing the gap between the formal and kerb markets, which has ultimately helped banks receive more remittances.

Bangladesh received an impressive $2.2 billion in remittances in August, the first month of the interim government. This trend continued in September, with $2.4 billion received – an increase of 80.22% year-on-year, as remitters responded positively to the demand-driven rate.

Meanwhile, import expenditures continued to decline, registering negative growth, while export earnings recorded positive growth, contributing to the availability of dollar holdings for banks.

"Banks were able to settle their import payments from their own sources," said a senior executive of the central bank, on the condition of anonymity.

He added that the Bangladesh Bank would not consider increasing the dollar price further if inflation decreases and reserve depletion stops.

The country's gross foreign exchange reserve has remained stable at over $19 billion since August, according to central bank data.

The Bangladesh Bank stopped providing liquidity support to troubled banks through printing money after Ahsan H Mansur took the governor's charge. Soon after his appointment, he restructured the boards of nine scam-hit banks, which had previously survived by taking liquidity support from the central bank.

The Bangladesh Bank has stopped clearing cheques for banks unable to maintain a balance in their accounts.

Under Hasina's regime, then-governor Abdur Rouf Talukder allowed cheques from S Alam-controlled banks to clear despite negative balances by creating suspense accounts instead of halting transactions, contrary to banking rules.

However, following the regime change, the Bangladesh Bank discontinued this practice and instructed weak banks to clear their cheques and repay depositors' money through inter-bank transactions.

The Bangladesh Bank introduced a new mechanism by providing guarantees for these weak banks to borrow money from the interbank market.

"Providing guarantees is also another form of printing money if those banks are unable to repay the borrowed funds," said another senior executive of the central bank. "The good thing is the central bank does not need to print money for now."

He explained that if banks can rebuild customer confidence, they may be able to repay the borrowed money, and the central bank will not need to print money.

The Bangladesh Bank has so far provided guarantees of nearly Tk5,000 crore for weak banks, enabling them to borrow money through interbank transactions.

Good banks flooded with deposits 

While some banks are struggling to manage liquidity, stronger banks are experiencing increased cash flow as deposits shift towards them.

For instance, net operating cash flow per share (NOCFPS) more than doubled in the first nine months of this year for six private commercial banks – BRAC, City, Dutch-Bangla, Eastern, Jamuna, and Mutual Trust.

The significant increase in cash flow resulted from high deposit inflows and low loan disbursement, according to quarterly disclosures posted on the Dhaka Stock Exchange website.

BRAC Bank's NOCFPS nearly doubled to Tk49.51 for January-September 2024, compared to Tk25.10 in the same period the previous year.

"NOCFPS increased significantly for the reported period mainly due to higher deposit mobilisation from customers and bank borrowing, as well as slower loan portfolio growth compared to the same period of the previous year," the bank stated.

All five other banks cited the same reasons for their cash flow increases.

On the other hand, troubled banks like Islami Bank, the largest private commercial bank, experienced a negative NOCFPS of Tk3 for the January-September period.

However, the cash shortage improved compared to the same period last year, when NOCFPS was negative Tk48. This improvement was due to a Tk7,374 crore deposit placement from other banks. The bank was freed from S Alam Group through board dissolution after the regime change.

Similarly, Social Islami Bank, previously controlled by S Alam Group, also registered negative cash flow. However, it managed to secure deposit placements from other banks after board restructuring.

M Sadiqul Islam, the newly appointed chairman following the Bangladesh Bank's dissolution of the previous board on 25 August, said the bank received Tk900 crore in liquidity support from other banks under a guarantee from the central bank. The bank also recovered nearly Tk800 crore within two months under the new board's leadership.

Speaking with journalists at a recent event, Sadiqul said several strategic steps were taken to strengthen the bank's liquidity position.

"First, the bank reactivated temporarily suspended collection accounts with 18 organisations, including DESCO, Titas, Palli Bidyut, BTCL, BRTA, DPDC, and WASA, among others," he said, adding that they expect to generate approximately Tk500 crore through bill collection, similar to previous periods.

"Second, we are honouring small pay orders and clearing checks. For a limited period, we are allowing cash withdrawals over the counter up to a specified amount. We believe this will help restore confidence among our customers," Sadiqul said.

"We are also prioritising remittance customers, reaching out to previous clients who used to send their hard-earned money through us, and encouraging them to continue using SIBL for remittances," he added.