Recent Liquidity Crisis

Liquidity in any commercial bank and financial institution reflects its overall financial position. In fact, liquidity condition largely depends on fund management. The management of all financial institutions usually lend out their 'deposit' money as a part of their business for earning income. The decision about how much money will be invested to earn income and what should be the comfortable percentage of 'liquid' assets has to be judicious. The central bank has got its mandatory reserve ratio that the banks have to comply with. This ratio is subject to changes in accordance with the changes relating to economic forces in the market. Why does the liquidity position suffer? If the bankers do not abide by the norms of the central bank and lend out money unjudiciously, there arises the problem with liquidity. The abnormal long-term finance and unsatisfactory recovery position of short-, medium- and long-term loans will adversely affect the liquidity situation. The loans in priority sectors may be the casualty in the process, and loan, the govt., and the central bank will then have to replenish the fund sometime. The leaders of country's apex body in a recent roundtable discussion feared about the 'liquidity crisis' in the commercial banking sector. But the above fear is not founded well in the context of the ground realities of the country. All we know is that the economy is facing a double-digit inflationary pressure. During the period of inflation, money expansion is a routine situation. The price level soars up, resulting in flow of more money in the hands of the people. Again, the purchasing power of the people is reduced. To curb inflation, the central bank has then to take the monetary control measure like raising of both lending and deposit rates. The govt., has to release its security papers in order to withdraw surplus fund from the market. But the central bank in our situation has, of late, instructed the banks to reduce their lending rate in order to inject more money in the hands of the people to improve purchasing power in a price-spiralling situation. It has not called upon the banks to raise their despite rate to attract surplus fund, if any, in the market. Apart from inflationary pressure, we can see there are enough funds in the capital market. We have noticed wherever IPOs (initial public offerings) of public companies are genuine in the market, thousands of applications are received. Irrespective of business prospects, the IPOs have most of the time been found to be oversubscribed. Wherefrom is this liquid money coming? The money is again back to banks as deposit to be lent out as or loans. The leader of the apex body of the businesses has, meanwhile, suggested to demonetise the 500-taka note which, according to him, are being kept outside the bank account. Such a step, as proposed, will be suicidal, if implemented. Because whether the central bank or the govt., has sufficient funds to give the exchange value of such 500-hundred taka notes, in the event of demonetisation. The people will get panicky and will try to rush to bank to change the notes. The 'concealed' notes cannot create any liquidity. Because no one will keep the note for a longer period because concealed money does not give any increment. So

the money will come in circulation though various kinds of transactions. Then, the same will again go back to bank accounts. The main reason of the liquidity problem under the given circumstances is that the income of the general public has not been increased. The price of everything has increased. The people are somehow managing their livelihood by withdrawing, the fund from savings. Secondly, as a tactics of fund management the commercial banks may not be thinking it proper to invest everywhere. They may be going on a, on a selective basis. Most businessmen and industrialists have made investments in the banking sector. Many of them are aware of their own fund position. The businessmen and industrialists very often tell us about the injecting more funds to promote business. But very few of the businessmen tell about recovery of the loans. The reason of liquidity crisis, if any persisting in the financial sector, may be the non-recovery of loans. The overall percentage of recovery of loan is very alarming. Most banks in both private and public sectors, are showing their recovery position, taking the advantage of rescheduling. The rescheduling tactics have also failed. Because the rescheduled loans too run on an irregular footing due to non-payment of instalment dues. By now the state-owned banks have taken many steps to recover their old loans but could not show any improvement. The state-owned public limited companies should give due consideration to waiver of interest. If need be, the public limited banks should waive the interest of all defaulted borrowers and declare a general amnesty up to a certain period to get back their principal amount of the loans. Then both the banks and defaulted bankers will get some relief. Money will start coming to the banks vault. The liquidity position will improve. The state-owned banks will then be able to sustain the burden of loss. But the businessmen or traders who failed to repay loans due to various reasons cannot afford to bear the burden of huge interest and suit costs, if any. It is believed that more than 40 per cent of liquid money has been locked up. Recovery position can only help to bring the liquidity position back to the rail.