Liquidity management to be a major challenge in post-pandemic period
Liquidity management found in the banking sector will become a challenging task soon as a result of coronavirus fallout, said Mominul Islam, managing director of IPDC Finance.
Besides, the non-bank financial institutions also struggled with funding for days gone by two years while the liquidation of the People's Leasing Financial Offerings company has only intensified the sector's woes.
As a result of current crisis, government borrowing from the banking sector will go up while deposits may drop along with mortgage repayment, Islam said during an interview with The Daily Star last week.
He reveal the challenges and options the financial sector may face in the forthcoming days.
"Liquidity will never be a big difficulty right now because of actions taken by Bangladesh Lender," said the top official of IPDC Finance, the country's first individual non-bank lender established in 1981.
Among the steps was a good cut in the money reserve ratio (CRR) and repo rate for financial institutions.
The banking regulator reduced the CRR for all finance institutions by 100 basis points to 4 % while the repo price was shrunken by 50 basis points to 5.25 %.
In the upcoming days, private sector credit demand will go up alongside the general public sector demand, he explained.
Since income collection by the National Plank of Revenue hasn't yet reached its target level, it'll create more credit demand from the government's side.
"So, the liquidity supply could deteriorate along the way," Islam added.
Considering the circumstances, the Bangladesh Leasing and Finance Companies Association (BLFCA) provides asked the government to supply the sector with a particular refinancing scheme of Tk 10,000 crore in bank rates for the next 10 years.
"If we get these cash, then our liquidity shortage will get solved," said Islam, who is as well president of BLFCA.
The country's financial sector can be seriously lacking in different ways credited to the lack of an effective bond industry. If a proper bond market is not established, then it really is impossible to save lots of the industry from liquidity shortages over time.
"Now, lenders are financing term loans with short-term deposits, which is not a sustainable alternative," the managing director explained.
However, it brings hope that the financing minister and just lately appointed chairman of Bangladesh Securities and Exchange Commission have previously emphasized on the necessity to create a bond market.
However, there usually do not seem to be such measures contained in the proposed cover fiscal 2020-21.
Although the federal government claimed to have lowered taxes in the brand new budget, there was no clause for advance tax on bond owners, that was proposed this year.
"It'll deter the relationship market's development instead of help it move forward," said Islam.
Another step the government has taken is certainly to make the tax relevant on commissions instead of transactions.
"This is an excellent initiative however the impact is quite marginal," the managing director continued. "We anticipated the federal government to exempt taxes for a time staying or at least reduce the rate to greatly help develop the market.
However, the federal government issued a new taxes for individual and corporate investors on the subject of the purchase of zero voucher bonds.
This is a huge blow to the development of the bond market, he added.
Making matters worse is normally that non-undertaking loans (NPL) is definitely another challenge faced simply by the financial sector, which is undergoing a transition period due to the ongoing coronavirus pandemic.
However, the amount of NPLs in Bangladesh can be viewed as to be abnormally large.
The government has already relaxed the fines on overdue payments for loans until June but it may extend the deadline taking into consideration the deteriorating Covid-19 situation.
To address the problem, banks should hold discussions with their buyers to analyse the easiest method to manage NPL issues.
"We have to keep our buyers alive as well being that they are the lifeblood of our organization," Islam said.
In order to do so, finance institutions should keep huge fund provisions so that they are able to handle any liquidity issue in the coming days.
Banks will also have to be cautious when managing their expenditures aswell so that unnecessary costs usually do not become a good cause of capital erosion during such a period of crisis. Finance institutions will desperately want the amount of money to regain their organization after the pandemic concludes.
Investment found in the country's healthcare sector could also increase as the coronavirus has verified that the sector is fragile and lacking money. Likewise, the e-commerce sector could have an opportunity to grow as buyer behaviour has changed drastically previously few months.
Digitization may also become another booming sector as much offices conduct all their business-related activities online in an effort to keep their workers' safe and sound from infection.
To greatly help facilitate these opportunities, financial institutions have to keep an ample supply of funds therefore that they do not need to require extra provisions in the returning years.
"At the moment, we need not keep provisions thanks to insurance plan support from the central lender. However, in the next few years, we will have to end non-performing loans," Islam explained.
So, if banks keep adequate provisions from now on, they will be able to help the economy recover fully following the end of the pandemic.
In response to a query, Islam explained political influence or any various other external influences in money lending creates risk for the sector. It is because whenever a lender provides funds without conducting a proper assessment, it could bring about a default.
Banks that have strong corporate governance and honest shareholders do not face such problems but those that carry out, suffer greatly, he added.
About the IPDC's recent growth, Islam said the business took a new progressive business approach in 2015.
Before providing progressive loan, IPDC tried to minimise its non-performing loans, which gave an outcome, pulling it straight down from 37 % to 2 % during 2006-2014, he said.
