Banking sector will be under liquidity stress

The problems that the banking sector is facing now are likely to deepen in the coming year. In particular, their lending capacity will decline. Banks may not get the amount of liquidity support they need because their debts have increased but not their deposits. As a result, there will be some mismatch.

Converting stimulus package loans into term loans and extending the repayment time is another reason for the liquidity stress. Otherwise, the loans would have been returned to the banks so they could lend again. Due to these lingering issues, there will be some pressure on cash in the banking channels next year, and the situation will be especially cumbersome for weak banks.

The predicted growth in private sector credit will be difficult to achieve with the monetary policy going forward. On the contrary, if growth is low, it will reduce inflationary pressure, which is a positive impact. However, the banks will get some relief if the central bank continues to provide liquidity support.

In addition, banks will have to prudently maintain liquidity and credit management in 2023. Considering the present scenario of savings and inflation, it will be hard for banks to get additional money from the market. So, the banking sector naturally has to exercise caution in making decisions.

Although there is a crisis now, it seems that we will have a good foreign currency liquidity situation next year as banks will buy fewer US dollars from the central bank in 2023 than they did in 2022. The settlement of a number of letters of credit (LCs) was deferred in 2020, which matured in March 2021, resulting in a big shock in our country's balance of payments and trade balance. 

Hopefully, the new year will not see something like that. Besides, remittance and exports may increase further. We have received many garment exports orders as China grapples with production issues due to Covid.

The Bangladesh Bank is continuously providing foreign currency and liquidity and policy support to the banks, which should be extended next year as well so that the banks can move forward. Without support, many banks will be in a quandary.

Banks now have no way to regress from digitalisation and technological advancement. New technology adaptation and use will expand in the banking channels next year. Banks that delay or skimp on investing in technology will find it difficult to retain business as a large segment of customers are now accustomed to banking using technology. So, banks should go into partnership with fintech companies and increase investment in new technology. 

Besides, banks should expand their reach in villages and remote areas to increase rural participation in the national economy.

The banking sector is now a bit loosely managed. Corporate governance needs to be strengthened. Banks also need to be more attentive to capital and risk management. Otherwise, the banking sector will suffer in the long run. The good players will suffer for a few bad players. Finally, as the new year approaches, we need to reassess our banking sector.

Arfan Ali is the former managing director of Bank Asia

TBS Correspondent Tonmoy Modak talked with Arfan Ali