Summary:

• The dollar rate and reserves have remained stable since the regime change in August
• The foreign exchange market saw significant development thanks to strong fund inflows
• Import spending continued to decline, while exports recorded positive growth
• Interbank transactions have resumed thanks to political measures
• Some banks are struggling to manage their liquidity, while the strongest are seeing their cash flow increase

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

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

However, depositor confidence remains fragile as nine weak banks are still unable to fully repay their customers, according to market experts.

The reconstruction of the boards of nine banks – seven of which were controlled by the S Alam Group – put an end to further scams and their laundering of depositors’ money.

Today, these banks have started honoring their customers’ checks on a limited scale, gradually helping to restore depositor confidence.

At the same timeThe foreign exchange market saw significant development thanks to solid inflows of funds following the fall of the more than 15-year regime of Sheikh Hasina on August 5, amid a massive upsurge in students.

Additionally, the Bangladesh Bank ended its daily interference in the foreign exchange market, which also helped ease rate fluctuations, bankers said.

In August, the money market regulator set the remittance rate at a maximum of Tk120, in line with market demand, and it remained stable as the rate gap with the informal market narrowed at 1-2 Tk against more than 10 Tk previously.

Speaking to the Business Standard, Sheikh Mohammad Maroof, managing director of Dhaka Bank, said less interference from the central bank had helped keep the rate stable. Furthermore, the demand-driven remittance rate has encouraged remittance senders to send more remittances through the banking channel.

“Liquidity has improved in most banks, except a few stressed banks, due to a decline in investment demand,” he said. The senior banker added that although the money market crisis has gradually eased, investor confidence remains fragile due to political uncertainty.

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

Actions taken by the central bank after the regime change

The Bangladesh Bank took three major steps: it halted sales of dollars from its reserves, ended liquidity support to troubled banks, and rebuilt the boards of nine weak banks.

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

The dollar price was increased to Tk120, thereby narrowing the gap between formal and government markets, which ultimately helped banks receive more remittances.

Bangladesh received a staggering $2.2 billion in remittances in August, the first month of the caretaker government. This trend continued in September, with $2.4 billion received, an increase of 80.22% year-on-year, as remittance senders responded positively to the demand-driven rate.

At the same time, import expenditures continued to decline, recording negative growth, while export earnings recorded positive growth, contributing to the availability of dollar reserves for banks.

“Banks have been able to settle their import payments from their own sources,” said a senior central bank official, speaking on condition of anonymity.

He added that the Bangladesh Bank would not consider raising the price of the dollar further if inflation came down and reserve depletion stopped.

The country’s gross foreign exchange reserves have remained stable at more than $19 billion since August, according to central bank data.

The Bangladesh Bank stopped providing liquidity support to troubled banks by printing money after Ahsan H Mansur took over as governor. Shortly after his appointment, he restructured the boards of nine scam-hit banks, which had previously survived on central bank liquidity support.

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

During the Hasina regime, the then governor Abdur Rouf Talukder allowed checks from S Alam-controlled banks to be cleared despite negative balances by creating suspense accounts instead of stopping transactions, unlike the banking rules.

However, after the regime change, the Bangladesh Bank stopped this practice and asked weaker banks to clear their checks and refund depositors’ money through interbank transactions.

Bangladesh Bank has introduced a new mechanism by providing guarantees to these weak banks so that they can borrow money from the interbank market.

“Providing collateral is also another form of money printing if these banks are unable to repay the borrowed funds,” another senior central bank official said. “The good thing is that the central bank does not need to print money at the moment.”

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

The Bangladesh Bank has so far provided guarantees of nearly Taka 5,000 crore to weak banks, allowing them to borrow money through interbank transactions.

Good banks flooded with deposits

While some banks struggle to manage their liquidity, stronger banks experience an increase in cash flow as deposits are transferred to them.

For example, 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 was a result of high deposit inflows and low loan disbursements, according to quarterly information published on the Dhaka Stock Exchange website.

BRAC Bank’s NOCFPS almost doubled to Tk 49.51 for January-September 2024 from Tk 25.10 in the same period of the previous year.

“The NOCFPS increased significantly during the period under review, mainly due to higher mobilization of customer deposits and bank borrowings, as well as slower growth in the loan portfolio compared to the same period of the previous year,” the bank said.

The other five banks cited the same reasons for the increase in their cash flow.

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

However, the liquidity crunch has improved compared to the same period last year, when the NOCFPS was negative by Tk48. This improvement was due to deposit placement of Taka 7,374 crore with other banks. The bank was freed from the S Alam group through the dissolution of the board of directors after the regime change.

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

M Sadiqul Islam, the new chairman appointed following the dissolution of the previous board of directors of Bangladesh Bank on August 25, said the bank received Tk 900 crore in cash from other banks under the guarantee of the central bank. The bank also recovered nearly Tk 800 crore in two months under the new board.

Speaking to reporters at a recent event, Sadiqul said several strategic steps have been taken to strengthen the bank’s liquidity position.

“First of all, the bank has reactivated temporarily suspended collection accounts with 18 organizations, including DESCO, Titas, Palli Bidyut, BTCL, BRTA, DPDC and WASA, among others,” he said, adding that It expects to generate around Tk 500 crore from bill collections. , similar to previous periods.

“Second, we are honoring small payment orders and clearing checks. For a limited period, we are allowing over-the-counter cash withdrawals up to a specified amount. We believe this will help restore the confidence of our customers,” Sadiqul said.

“We are also prioritizing customers making remittances, contacting previous customers who used to send their hard-earned money through us and encouraging them to continue using SIBL for remittances,” he said. added.