Liquidity Crisis in BD

Causes of recent liquidity crisis of banking sector  Liquidity refers to the supply of the means of payments of an economy. In Bangladesh, the totality of liquidity is indicated by what is called 'broad money' or M. ! shor shorta tage ge of mone money y rest restri rict cts s dema demand nd by makin making g it more more diffic ult to engage in transactions. In"estment is particularly susceptible to liquidity. #ow the main causes of liquidity crisis of banking sector are gi"en below$

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In the recent year, our country has e%perienced a decline in the "alue of &k against ( currency which has created has huge liquidity crisis in the banking sector. )or this reason our country has failed to collect ma%imum amount of ( dolla dollarr requir required ed to open open lette letterr of credit credit *LC+ *LC+ for local local busin busines essme smen n to import import essential essential commodities for the country. !s a result the importer is facing a se"ere crisis in their business.

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&he banks need to reser"e huge amount of money with the Bangladesh Bank as it is mand mandat ator ory y for for them them to main mainta tain in the the C C and and (L. (L. BB has has rece recent ntly ly increased the rate of C and (L as a result the problem of liquidity crisis has been aggra"ated recently. &he central bank during last -ecember raised the cash reser"e requirement *C+ by si% percent for commercial bank.

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 !s the increased increased percentage percentage of C and (L the commercial commercial bank is facing liquidity problem and for this reason to get rid of the problem this banks banks are concentrat concentrated ed to generate generate more deposits deposits.. &o generate generate more deposits they ha"e to increase the deposit deposit rate which has a ad"erse effect in the society.

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o"ernment credit from banking sector that would create e%tra burden to the country/s banking sector and it creates more liquidity crisis in that sector. the go"ernm go"ernment ent has already borrowed borrowed &k 001 billion from the country/ country/s s banking banking sector to met the e%isting budget deficit during last 01 months *2uly 101 to !pril 100+, while last year it repaid &k 34.5 billion loans. In the recent future the commercial banks will be unable to pro"ide loan to the pri"ate sector.

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If the bankers do not abide by the norms of the central bank and lend out money un 6udiciously, there arises the problem with liquidity. &he abnormal long7term finance and unsatisfactory reco"ery position of short7, medium7 and long7term loans will ad"ersely affect the liquidity situation.

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&he liquidity crisis of the banking sector has been accelerated by the increased amount of inflation8 thus increasing the price of o"erall commodities for the general people. &o keep peace with this inflationary effect, the people withdraw their sa"ings from the banks and use this fund for their transactionary e%penditure. !s a result the bank faces liquidity crisis.

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&he reason of liquidity crisis, if any persisting in the financial sector may be the non7reco"ery of loans. &he o"erall percentage of reco"ery of loan is "ery alarming. By now the state7owned banks ha"e taken many steps to reco"er their old loans but could not show any impro"ement. &he state7owned public limited companies should gi"e due consideration to wai"er of interest. But the businessmen or traders who failed to repay loans due to "arious reasons cannot afford to bear the burden of huge interest and suit costs.

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In yearly period, the commercial banks perform acti"ities of in"estment banks, and for in"estment banks to also perform acti"ities of commercial banks *i.e. to borrow short and to lend long+. !s a result there is a combination problem of liquidity risk and credit risk and the problem becomes more uncontrollable and se"ere.

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9"ere%posure in deposit7lending ratio, credit to deposit ratio *C-+ is causing the liquidity crisis of the pri"ate commercial banks *:CBs+. Besides to make windfall profit and engaged in unhealthy competition amongst the banks leading the banking into a deep crisis. !lthough the Bangladesh Bank *BB+ has set 2une ;1 as deadline for bringing down to C- to a rational le"el, still many of the pri"ate banks are lagging behind to maintain it, according to a BB official.

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elationship of liquidity with the reser"e and call money rate$