Mohammad Jobayer Alam is the Head of Treasury and Strategic Planning at IDLC Finance Limited. As the Head of Treasury and the convener of the Asset Liability Management Committee (ALCO), he is responsible for the Liquidity and Interest Rate risk management of the company. In a career spanning more than 13 years, he has also gained expertise in strategy, corporate finance, and financial planning functions with the exposure of working in global companies in different industries.

MBR: What is your take on the current liquidity scenario in the banking system? What, in your opinion, are the reasons behind this?

Mohammad Jobayer Alam:

Currently, most of the banks and financial institutions are experiencing comparatively tight liquidity situation and have started accepting deposits with double digit interest rates. Imbalance in key money market factors have played a key role behind this phenomenon. However, even a couple of years back, banks were riding on excess liquidity. At the backdrop of political certainty, the credit demand gradually went up. While the economy saw record-high credit growth, deposits have failed to keep pace. As such, the excess liquidity was quickly mopped up.
Overall, there were numerous factors that contributed to the tightened liquidity scenario that the financial system is facing today. Among other things; slow deposit growth compared to credit growth, rising NPLs, growth in sale of National Savings Certificate and the selling of USD by Bangladesh Bank - to avoid a dollar shortage and to maintain exchange rate stability - have been some of the reasons.
The origination of the existing scenario dates back a couple of years as private sector credit growth consistently outpaced deposit growth. In the meantime, rising Non-Performing Loans (NPLs) meant that large quantities of funds expected to be recovered and funneled back into lending operations never came through.
Meanwhile, sale of National Savings Certificates (NSCs) has kept growing. In calendar year 2018, growth in NSCs was over BDT 47,000 crore. As compared to this, the gap arising from the excess of credit growth over deposit growth in the period was roughly BDT 17,000 crore only. Of course, it wouldn’t be fair to assume that all the funds invested in the NSCs would have found their way into the banking system as deposits. However, its high interest rate definitely makes it a significant alternative and the growth in NSC sales did put added burden on the liquidity scenario.
On top of these, current account deficits that resulted in negative growth in Net Foreign Assets (NFA) led the central bank to extend support for the exchange rate through selling foreign currency to the banks. These operations resulted in the extraction of over BDT 30,000 crore out of the market over the last one and half years.

MBR: How will the ongoing liquidity situation impact the country’s gross economic performance in terms of growth, employment, inflation, exchange rate and savings?

Mohammad Jobayer Alam:

Bangladesh has emerged as one of the fastest growing economies of the world. According to latest government forecast, GDP growth is set to cross 8.00% in the current fiscal year. Such growth requires both private and public sector investments to play a vital role.
Although both credit growth and deposit growth have slowed in the past few months, given the strong demographic drivers and bottom-up growth in national incomes, the current liquidity scenario is not expected to significantly suppress the country’s economic growth and employment prospects.
The impact on inflation would depend, among other things, on the leverage levels of organizations that command the markets for commodities and other items in the inflation basket. Whether their debt is from the formal banking system is a relevant factor as well. Given the reality of our country, the overall impact in this case, should not be too significant.

Since BDT liquidity gets further restricted when releasing foreign currency reserves to the banking channel, it may be difficult to support the exchange rate on a continuous basis. However, central bank’s policies will ultimately dictate how the financial sector’s stakeholders would navigate through these challenges.
Theoretically, savings should increase on the back of higher interest rates. However, an overall rise in savings tendency would depend on savers confidence on the financial sector’s performance and comparative returns on other investment vehicles such as National Savings Certificates and Equities. 

MBR: What may be the impact on private sector credit growth in the backdrop of some big projects undertaken by the government?

Mohammad Jobayer Alam:

On the backdrop of the liquidity issues discussed here, banks and FIs have less money to lend, and subsequently, private sector credit growth will decelerate. This is only natural and we have already seen this happen in the last few months. Having said that, I do think the big projects undertaken by the government will actually boost the private sector credit growth rather than hampering it. In the last couple of years, government borrowing from the banking system has been below the budgeted level, especially on account of increased sales of National Savings Certificates. Also, most of the large infrastructure projects are expected to be undertaken with soft loans from multilateral institutions and other forms of foreign borrowing. As such, there should be little concern of funds being mopped up by government projects. On the contrary, work orders given out to private companies during the implementation phase may in fact boost private sector credit growth to some extent.

MBR: How is the external sector performing in Bangladesh at present? Is there any impact on the local currency’s liquidity in such context?

Mohammad Jobayer Alam:

External sector has been showing signs of improvement owing to strong growth in remittance and exports after registering a record deficit of around USD 10.0 billion in the Current Account during the last fiscal year. However, the current account balance is still running a deficit while Bangladesh Bank has been injecting US Dollars into the banking system in order to support the local currency’s value, as mentioned previously. This has in fact, put an additional strain on the liquidity scenario. 

MBR: According to media reports, Banks and FIs have been offering high interest rates to attract depositors in recent times. What would be the resulting impact on and likely expectations from the capital market?

Mohammad Jobayer Alam:

As interest rates rise, many investors tend to shift some of their exposure from equity to fixed income instruments. That being said, other than companies with extremely high leverage, these cyclical impacts are not expected to shake the foundations of the fundamentally stronger companies. Also, interest rate cycles are an ongoing phenomenon and the existing high rates are expected to be moderated gradually, while the market of loanable funds normally corrects itself over a period of time. Therefore, any impact on the capital market as a result of this are expected to be merely temporary.

MBR: What measures should the Government, Banks/FIs and Regulators undertake to address the present liquidity situation?

Mohammad Jobayer Alam:

In respect to the primary drivers of the current liquidity scenario, government needs to consider market-reflective interest rate setting of National Savings Certificates (NSCs) to avoid excessive sales. In addition to that, policies need to be adopted to ensure that NSCs are only sold to those in need of a social safety net. Primary focus of Banks and FIs should be to reduce existing classified loans and ensure credit quality of new loans. NBFIs, in particular, need to avoid over-reliance on bank borrowing and increase the concentration of core customer deposits and bonds in their funding basket. To complement these efforts, Central Bank needs to set a growth conducive target for interest rates and set monetary policy to adjust money supply accordingly. To increase money supply in the short term, repos with various maturities can be introduced. Meanwhile, as a medium to long term solution, refinancing schemes for 3 to 5 years tenor can be launched. Regulators also need to undertake policy measures to develop the bond market so that raising funds from alternative sources becomes cost effective and less time-consuming for Banks and NBFIs.