Liquidity Crisis of Banks in Corona Pandemic 2020
Table of Contents
Introduction ................................................................................................... 2
Challenges faced by Banks for non-performing loans during pandemic......... 3
A prospect for Bangladeshi banks to face a liquidity crisis ............................. 4
How the Other nations managing the Liquidity Crisis? .................................. 5
Liquidity Stress Management Reporting ........................................................ 6
Liquidity preservation and contingency funding ............................................ 6
Conclusions .................................................................................................... 6
Recommendations ......................................................................................... 7
Works Cited ................................................................................................... 7
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Liquidity Crisis of Banks in Corona Pandemic 2020
Introduction
The effect of Covid-19 pandemic on world economy is huge. Most of the economic activities are
stopped during the lockdown period. People are losing their jobs and unemployment rate is
increasing. The demand and supply chain find no option rather than lay off the workers. Cashinflow is irregular for the companies and cash conversion cycle are disrupted during the period. In
such case companies are unable to pay back the outstanding to the banks and the rate of NPL
(Non-performing Loan) is increasing day by day. In Bangladesh Liquidity crisis always is a big issue
for the banks. Moreover the Pandemic create the more difficulties for the bank to overcome the
liquidity crisis.
The experts say the projected GDP growth of Bangladesh is 1.6% in 2020 which was expected to
8.00% earlier before the pandemic. To run the economic activities government announced Stimulus
packages for the business entities which are given below. (Dhaka Tribune, 2020)
Package
Number
1
Amount
(In BDT
crores)
30,000
2
Beneficiary
Fund Sourcing
Industries and Servicesectors as working capital
loans
As loans from
commercial banks
20,000
Cottage, micro, small and
medium enterprises
(CMSMEs) as working
capital loans
As loans from
commercial banks
3
12,750
4
5,000
To facilitate raw material
imports under back-toback LCs
Pre-shipment Credit
Refinance Scheme for
local products alongside
the export sector
Bangladesh Bank
Export Development
Fund
Bangladesh Bank
Cost of Fund
4.5% by the
beneficiary and
4.5% by the
government as
subsidy
4% by the
beneficiary and
5% by the
government as
subsidy.
2%
7%
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Liquidity Crisis of Banks in Corona Pandemic 2020
The government declared 1 lac crore which is 3.3% of the GDP for all people ranging the
farmers, day labors, rickshaw pullers and small traders.to the industrialists to save the people
and the country’s commerce and industry from the possible impact of coronavirus.It is manifest
from these packages that their key tenacity is to support in different businesses so that they are
not distressed by the Covid-19 lockdowns. Both Commercial banks and the Bangladesh Bank
are doing the funding. Whereas the commercial banks might have an incur huge negative profit
during the covid-19 pandemic period. (Light Castle Partners, 2020)
Challenges faced by Banks for non-performing loans during pandemic
Non-performing loans are those loan when lenders absolutely fail to pay off the loan to the
banks. Raising NPL is dangerous for the economy and creates a fund crisis for the business. NPL
is the one of the biggest challenge for Bangladesh to overcome with which also is creating the
liquidity crisis. as the loanable fund are blocked as NPL there is a disruption between demand
and supply which also disrupting the economic activities. Bangladesh has been dealing with
loan defaulters for a very long time with 170,000 loan defaulters in total (as of 2019) and less
than 1 percent of those defaulters holding more than 50 percent of all the default loans.
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Liquidity Crisis of Banks in Corona Pandemic 2020
A prospect for Bangladeshi banks to face a liquidity crisis
Banks in Bangladesh are in a terrible condition as an effect of the explosion of Covid-19. Current
literature highlights the liquidity scarcity of banks. Given that, the question rises on how the
banks will cope with the improved demand for money. Even after the end of the pandemic, the
question arises whether the banks will have sufficient funds to cope with investment demands,
given their liquidity crisis? There is a high possibility government will try to maintain a lowinterest rate. That will hurt their savings option.
Furthermore, because of autonomous consumption, households (HH) will continue to withdraw
deposits from the bank. This will pile extra pressure on the bank’s liquidity. Banks can continue
to use monetary tools to push money into the economy. However, it increases the debt of the
government and the possibility of inflation. Combined recession and inflation would result in
stagflation, and this is a very unwanted scenario. (Choudhury, 2020)
Liquidity Crisis is an old issue for the commercial banks in Bangladesh. However the Commercial
Banks were overcoming day by day from this problem. According to the bankers the NPL will
might increase again and could be a big issue in the future after Covid-19 crisis. Thus, it might
be beyond the ability of the commercial banks to be able to provide the loans. The Bangladesh
Bank is also trying to ensure they can inject liquidity in the commercial banks. With that in
mind, the Bangladesh Bank reduced the repo rate to 5.75% from 6%. The repo rate is the rate
at which the Commercial Banks can obtain cash from the Bangladesh Bank. The Bangladesh
Bank also cut the Cash Reserve Ratio (CRR) to 5% which injected about BDT 64 billion to the
economy. However, the Association of Bankers deemed this to not be enough to obtain the
necessary liquidity and asked the Bangladesh Bank to reduce the repo rate to 5%, the Cash
Reserve Ratio to 4.25 and the Statutory Liquidity Ratio (SLR) to 11% from 13%. (Investopedia,
2020)
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Liquidity Crisis of Banks in Corona Pandemic 2020
The liquidity crisis was not a new issue for Bangladesh. It was always a big challenge for the
commercial banks to overcome the crisis. On the other hand the NPL also a big challenge for the
nation. To minimize the NPL, government decrease the rate and make it a single digit which is 9%
in February, 2020. To maintain a decent interest spread the deposit rate came down to 6%. In
such case depositors are demotivated to keep the money to the banks and banks are facing the
fund shortage. To ensure the post economic activities of the nation a huge amount of cash are
needed and the previous liquidity crisis could be a barrier to run the economic activities
efficiently. The experts predicted that the banks might be unable to collect the stimulus packages
money back which might be another storm for the economy. (Daily Star, 2020)
There will be a need for huge amounts of cash in the post crisis economy. Due to the previous
liquidity crisis and probable inability to collect the stimulus money back, there is a threat of a long
term liquidity problem.
How the Other nations managing the Liquidity Crisis?
The United Kingdom Treasury and Bank of England (BoE) has introduced a lending facility,
named the 'Covid Corporate Financing Facility (CCCF).' CCCF is designed to support liquidity
among larger firms, helping them to bridge Covid-19 disruption to their cash flows through
purchase of short-term debt in the form of commercial paper. The US Federal Reserve Board
established Commercial Paper Funding Facility (CPFF) to support credit flow to households and
businesses in the United States. The US Fed also established a Special Purpose Vehicle (SPV) to
directly buy eligible corporate debts from corporate issuers. Fed also established another SPV
to purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in
the form of exchange traded funds (ETFs) in the secondary market. Bangladesh Bank may
establish similar special purpose vehicles (SPVs) in order to directly buy corporate debt
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Liquidity Crisis of Banks in Corona Pandemic 2020
securities subject to meeting certain conditions. This special purpose vehicle may also invest in
corporate bonds to be listed in stock exchanges. (Rahman, 2020)
Liquidity Stress Management Reporting
A quantity of obligation put in place after the Covid-19 crisis. Banks need to inaugurate a
developments of invention of real time liquidity management reporting during the period of
anxiety. To recognize the cashflow intraday liquidity reporting could help the bank to monitor the
management competence. Management could have diminish the perceptibility and of wateriness
obtainability and shortfalls across the establishments. (Deloitte, 2020)
Liquidity preservation and contingency funding
In the existing market, banks have most likely squeezed liquidity cushions and have already
restrained executing actions documented in their CFPs to reserve liquidity. Banks should consider
a number of aspects as they begin to take exploit, opening with finding a correct view of
predictable cashflow and variability deficit crosswise substances and businesses. The size,
location, and expected duration of these shortfalls will impact decisions on liquidity preservation
actions in the short term and banks will need to decide whether to seek alternative sources of
funding in the longer term. (visual capitalis, 2020)
Conclusions
The market instability and economic effects subsequent from the COVID-19 crisis are ongoing
and frequently developing. Bank liquidity sides will need to ensure that they appreciate the
present and ongoing things, and put in place strategic explanations that can be reinforced for a
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Liquidity Crisis of Banks in Corona Pandemic 2020
hypothetically prolonged period. Effects to liquidity and funding accessibility, risk management,
reporting and management, and regulator requirements should be highlighted to enable
capitals to rapidly and efficiently report challenges and requests on an current basis. As the
crisis determinations, lessons will be learned. Strategic solutions that are put in place today
could lay the basis for more strong and advanced clarifications in the forthcoming. (tbsnews,
2020)
Recommendations
Bangladesh Bank may negotiate with multilateral growth associates, including the World Bank,
Asian Development Bank (ADB), Islamic Development Bank (IDB), and International Monetary
Fund (IMF), and float a special purpose vehicle of Tk 1.0 billion (100,000 crore) to this end.
Banks and non-bank financial institutions that enjoy highest credit rating may access this lowcost fund and start lending directly to businesses provided that they meet a few conditions
including employing a certain number of workers and retaining them on payroll. (COVID-19
impact on bank, 2020)
Works Cited
COVID-19 impact on bank. (2020). Retrieved from Deloitte:
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/regulatory/covid-regulatorsresponse.pdf
Daily Star. (2020, April 6). Retrieved 2020, from Daily Star:
https://www.thedailystar.net/business/news/mobilising-liquidity-top-priority-fazle-kabirbangladesh-bank-governor-1890004?browserpush=true
Deloitte. (2020). Retrieved from Deloitte:
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/regulatory/covid-regulatorsresponse.pdf
Dhaka Tribune. (2020). Retrieved from Dhaka Tribune: https://www.dhakatribune.com/opinion/oped/2020/04/29/will-covid-19-cause-an-economic-depression
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Liquidity Crisis of Banks in Corona Pandemic 2020
Investopedia. (2020, May 31). Retrieved 2020, from Investopedia:
https://www.investopedia.com/ask/answers/033015/how-did-financial-crisis-affect-bankingsector.asp
Light Castle Partners. (2020, May 5). Retrieved 2020, from Light Castle Partners:
https://www.lightcastlebd.com/insights/2020/05/05/government-stimulus-packages-in-covid19-will-it-be-effective-for-bangladesh
tbsnews. (2020). Retrieved 2020, from tbsnews: https://tbsnews.net/analysis/banks-should-focusmanaging-liquidity-post-covid-19-market-72676
visual capitalis. (2020). Retrieved from visual capitalis: https://www.visualcapitalist.com/the-anatomyof-the-2-trillion-covid-19-stimulus-bill/
Choudhury, S. R. (2020, March). cnbc. Retrieved from cnbc:
https://www.cnbc.com/2020/03/26/coronavirus-india-needs-a-support-package-larger-than-20billion-dollars.html
Rahman, M. (2020, March 30). The Financial Express. Retrieved June 10, 2020, from The Financial
Express: https://thefinancialexpress.com.bd/views/money-and-liquidity-in-times-of-covid-19some-suggestions-1585582579
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