Mehdi Zaman is the Head of Treasury of Eastern bank limited. Mehdi Zaman started his career with EBL and working there for 20 years. He was exposed to branch banking and International division before working as a Foreign Exchange Dealer in the Treasury Department

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

Mehdi Zaman:

It is natural to face liquidity pressure for the banking sector of any country when they are continuously having a significant amount of growth in the economy. Bangladesh is maintaining a handsome growth for a few years. To sustain the current growth trend it is quite natural for the economy of Bangladesh to get exposed to the current liquidity situation. The liquidity issue is an absolute macro phenomenon which is not possible to be controlled easily. But from all indicators it is apparent that this pressure of liquidity as something has to be borne to continue the growth trend of our economy. We all know that liquidity situation arises in two ways; one is excess liquidity and the other is shortage of liquidity. But normally what we understand from the liquidity crisis is when there is a shortage of fund in the market, whereas we faced excess liquidity situation back in 2016 which was less highlighted as a crisis can also be a concern. But to curb excess liquidity bank had to reduce the interest rate below the real interest rate. Many other policies were then implemented to get out of that scenario, the effect of which is still visible. But that scenario is passed and now we have a shortfall of the fund.
Now among the investment option available in Bangladesh, public banks are getting most of the investments consisting 50- 60% of the total fund. Major investment option for anyone is government bonds. If we consider the overall liquidity, government do have fund which is acquired through issuing bond that can be easily injected by issuing repo. But whether the government will issue repo and pacify the liquidity pressure is the decision of debt management body of Bangladesh Government. Hopefully, they will decide what is best for the country’s economy. But to mitigate the public concern, I can say that with the tool available to the regulator, liquidity pressure can be adjusted very easily. So, to be brief about the overall liquidity scenario- it is a natural phenomenon. Those who really need money right now will take the money and get the best out of the business even if there is a liquidity pressure. And ultimately this issue will be solved. Now it might need the help of the central bank, but as the current account balance is improving, in the near future it will be solved naturally.

State owned banks are having the lowest Advance- Deposit ratio around 55.00%, which means they have a large portfolio of Govt. securities. These securities or the govt. bonds are eligible for Repo with Bangladesh Bank. In current situation I think they can enter into repo transaction and lend the money to bank who are in need for liquidity. This process can pacify the current market shortage to a great extent. But whether the government will accept repo and allow govt. banks to lend in money market is the decision of debt management body of Bangladesh Government. Hopefully, they will decide what is best for the country’s economy.

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

Mehdi Zaman:

Current forecast of the growth rate for Bangladesh is around 8% and the growth rate for the last financial year was around 7.5%. When the growth rate is climbing up in such a high rate, it is natural for inflation that the exchange rate and the interest rate increase together with the growth rate. But there is nothing wrong with it because the growth of our country will be achieved in this process and there will be a sustainable growth for our country. The economy will absorb this pressure in the process of development with sustainable growth.

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

Mehdi Zaman:

Government is purchasing supplies from the private sector to run the big projects. So obviously these projects are going to boost the private sector suppliers of these projects. Local currency growth is smooth with all the elements supporting it. If Government can assure utility to the private sector, growth will continue. Those who are not supplier of government projects will face difficulty now to get fund because of higher interest rate, but in future the issue will be resolved. But overall credit growth will not be affected much because of the liquidity scenario. Because credit growth can be in two ways, one is supply driven and another is demand driven. For a long time, the market was more of a supply driven market. But now the market has become demand driven, those who require fund now will get that even if it is at a higher rate. So considering every aspect, credit growth should not be affected because of the liquidity pressure.

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

Mehdi Zaman:

Our external sector is doing really well. This requires an analysis of the huge amount of data to determine the probable impact of the liquidity situation. But the current situation is something that requires thinking but not of concern. Because as I said earlier, the central bank is ready to support the market with any amount of injection of the fund through repo.

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?

Mehdi Zaman:

Capital market investment is popular among people because regular deposit does not offer a high return. If there is a high return in deposit, people will invest in the deposit. But if we consider the case of 2015, the market interest rate was low during that time. However, it did not improve the stock market performance. So I think there is no correlation between the deposit rate and capital market, at least in Bangladesh. Bangladesh’s capital market requires market development as it does not have all the necessary components of a complete capital market. For the size of our economy, the capital market will be incomplete as long as it does not have any bond market. It is actually a requirement of a basic financial market. Without ensuring these facilities, introducing the components and spreading education among the participant of the market, the capital market will not grow.

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

Mehdi Zaman:

Government is ready to provide any support to manage the liquidity situation. However, one thing that should be addressed is the interest rate of government bond which is comparatively lower than that of saving certificates- that is also issued by the government. We need to invest in government bond to fulfill the SLR requirement. When financial institutions invest in bonds with a lower rate and at the same time savings certificate offers a higher rate, it creates some mismatch in equilibrium. Besides, taking a deposit at a higher rate than the government bond and then investing it in government bond will make a negative interest margin. The cost of the negative interest is ultimately borne by the people who are availing the loan. If the rate of both instruments offered by the government maintains similar rate, it would result a proper translation of the financial market. The pricing imperfection should be addressed by the government to maintain stability in the economy.