Dhaka, Bangladesh (BBN) – The state-owned enterprises (SoEs) will be allowed depositing 50 per cent of their funds with the private commercial banks (PCBs), up from the existing 25 per cent.

The decision was made at a closed-door meeting between the members of Bangladesh Association of Banks (BAB) and Finance Minister AMA Muhith on Friday evening.

Managing directors of 38 out of the 40 private banks were present at the meeting at the BAB, an organisation of private bank owners, in the capital.

“We thank the Finance Minister for this decision. This will go a long way in addressing the liquidity crunch of the private banks and to foster investment in the country”, Nazrul Islam Mazumder, chairman of the BAB told reporters after the meeting.

Currently, the state agencies are allowed to deposit 75 per cent of their funds with the public banks and rest 25 per cent with the PCBs.

However, private bankers for long have been demanding an increase in the share to meet the growing demand for liquidity in the banking sector.

In Friday’s meeting, representatives from The BAB formally requested the Finance Minister to increase the share to 50 per cent, to which, Mr. Muhith agreed.

“There is no liquidity crunch in the overall banking sector. But private banks are facing this crisis as majority amount of government funds has been deposited in state-owned commercial banks,” the BAB chairman explained.

He also said the public banks now have excess funds of over BDT 1.0 trillion.

The government’s latest decision came against the backdrop of rising trend of the overall deposit rates since the beginning of this calendar year, primarily due to withdrawal of funds from the PCBs by a section of depositors, including public sector agencies.

The withdrawal, according to the sector insiders, has resulted in a notable shortage of liquidity in the sector recently.
The problems centering the Farmers Bank Ltd (FBL) and some other scams have created a sort of crisis of confidence in the banking industry.

Most SoEs are now reluctant to keep their funds with the PCBs that are suspected to be fundamentally weak.

Some SoEs particularly oil and gas distribution companies have already withdrawn a part of their special notice deposits from PCBs, they added.

The PCBs are now forced to offer higher rates to comply with the funded commitments to their clients as per respective schedules, they explained.

The situation emerged after the Farmers Bank failed to pay a fixed deposit worth over Tk 5.08 billion due to liquidity shortage.

The money belongs to the Climate Change Trust Fund (CCTF).

After the incident, the government fund managers particularly of power, energy and gas sectors are exercising caution while depositing funds with different PCBs.

Earlier on February 17 last, BB Governor Fazle Kabir at a function sought the finance minister’s intervention to stave off withdrawal pressure coming from the state entities.

During the meeting, the private bank leaders also requested the Finance Minister to reduce the Cash Reserve Requirement (CRR) by 3.0 per cent. They also wanted to bring the interest rate on loan to single digit.

Mr. Mazumder said this measure will help banks to get an additional BDT 300 billion in liquidity. “A huge amount of fund is now stuck in the central bank in the form of cash reserve requirement. The fund cannot be invested and it does not play any role in containing inflation.”

The interest rate on lending will come down to a single digit again if the central bank cuts the CRR, he added.

Banking industry leaders informed that they will hold another meeting with the central bank governor Fazle Kabir on Sunday to resolve other issues.

Speaking on the occasion, Finance Minister AMA Muhith said that the government will not take any decision this year which can hurt the economic growth.

“Our target is to reach 7.5 per cent economic growth this fiscal year and 7.8 per cent growth in the next fiscal year”, the finance minister noted.

Among others, Economic Relations Division Secretary Kazi Shofiqul Azam, Bank and Financial Institutions Division Secretary Yunusur Rahman, Islami Bank Bangladesh Chairman Arastoo Khan, IFIC Bank Chairman Salman F Rahman and Premier Bank Chairman HBM Iqbal attended at the meeting.

BBN/SSR/AD