The country's banking system, already creaking under bad debts and other irregularities, now faces

unprecedented challenges as the ongoing pandemic takes its toll on the economy. Economic problems,
when they fester and get compounded, affect social cohesion. This new reality is making senior bank
executives anxious because the prognosis for the foreseeable future concerning a range of performance
metrics, including profitability, liquidity, and capital is not good.

In order to soften the impact of simultaneous demand and supply shocks, the Bangladesh Bank (BB), in
concert with commercial banks and non-bank financial institutions, has taken in hand emergency plans.
To plan ahead is to be prepared for the body blow anticipated from the (as yet unknown) severity and
duration of Covid-19. Fortunately, we can draw on the lessons of the global financial crisis of a decade
ago.

The prime minister has quickly placed generous stimulus packages before the nation. The mere
presence of fire-fighting measures, it is hoped, will signal that authorities are on the ball. The central
bank sprang into action with alacrity by issuing a host of directions and guidelines. Apparently, however,
a number of those instructions are not workable in their present form. Additionally, worries have been
expressed to the effect that profits will be depressed as a result of the BB's instruction to suspend
interest for April and May. There is more pain still.

Banks are barred from compounding interest on credit cards for the above period. Starting in April banks
are having to adhere to a 9.0 per cent interest rate ceiling on loans. Margins will thus come under
pressure because the cost of funds (CoF) of private banks hovers around 7.0 per cent. A silver lining is
that inter-bank call money rate is less than CoF; but this source might prove erratic in the coming
months.

Observers fear that several banks will record operational losses for the first half of 2020. A major
contributing factor will be a significant decline in fee income from exports, imports and remittances.
According to one CEO, non-funds-based income should ideally contribute about 30 per cent of total
revenue stream of banks. But this percentage is already under 20 per cent. In this context, cost-cutting
seems an imperative.

A combination of job cuts and/or a brake on fresh recruitment are likely. Moreover, there is scope to
trim fat from occupancy costs in the form of rent, electricity and outfitting. Banks may also choose to
curtail large gatherings, travel and entertainment. If banks can be cajoled to form consortia there is a
good opportunity to rationalise ATM setup and running costs; there being duplication of ATMs in certain
locations. Information technology is expected to play a more prominent role in many spheres of
banking, especially, in terms of cost containment and innovation. Withdrawal limit from ATMs has
already been increased. As one country manager pointed out, technology is scalable whereas the human
factor is not.

As for liquidity one school of thought is of the view that there is slack in the system. Firstly, the deposits
of government banks are much lower than their advances leading to comfortable advance to deposit
ratios (ADR). Secondly, a number of banks own government securities in excess of their statutory
liquidity ratios (SLR). Thirdly, a large chunk of the stimulus package consists of refinancing. Fourthly, the
lowering of the cash reserve ratio (CRR) to 4.0 per cent is expected to free up approximately Tk 190
billion system-wide. If the easing of the SLR is also taken into account the freed-up funds could reach Tk
300 billion. Fifthly, the central bank has lengthened the tenor of repo operations to 360 days.

Contrary-wise loan repayments will surely slow down on the back of projected cash flow difficulties
faced by borrowers. Pressure will also build up to disburse fresh loans from the fount of the stimulus
packages. The above factors will put pressure on liquidity. As for deposit collection government banks
have an advantage over private banks because the public views the former group as sovereign risks.

Bankers also want changes in the provisions regarding dividends and loan provisioning. They say that the
imposition of extra tax in case no dividends are paid (for 2019) is harsh. They have also requested to dial
back some of the provisioning requirements for 2020 so that profits do not evaporate.

The above request is not out of place. Government revenues will undoubtedly take a hit as bank profits
slide. Moreover, banks need strong legs to stand on as they have a mammoth presence in our financial
system. International agencies such as Moody's give a lot of weight to the stability of the banking system
when calculating country ratings

1 Money and Liquidity in Times of COVID-19 Pandemic: The Role of Bangladesh Bank Dr. Mizanur
Rahman1 The world economy is hugely disrupted by the outbreak of coronavirus-2019. Countries
across the global are facing a risk of an outright disintegration as global supply chain is almost
dismantled. Transport network is broken. Labor mobility is impeded as people are locked down at their
homes. Business enterprises, small and large, are either shutdown or closed for an indefinite period.
Uncertainties are mounting as households and businesses are facing liquidity crisis. As COVID-19
infections are accelerating in Bangladesh, businesses faced with falling demand and broken supply chain
will find no option but to lay off workers. Employment in the non-farm and informal sector is just
collapsing. That will however soon be destabilizing and chaotic. Government of Bangladesh must avoid
this end by several mechanisms. Given that government borrowings from banks have surged in recent
years and liquidity crisis is prohibitive in our financial system, we expect no big room for
budgetary supports like the United States and other developed countries are now doing. The best
course of action is that Bangladesh Bank orchestrates a substantial monetary expansion targeting repo
rate of 4 percent and lending rate in the range of 5-8 percent. To this end, Bangladesh Bank can
immediately start discounting government bonds and treasury bills held by the primary dealers and
offer them overnight and term funding with maturities up to 90 days. Bangladesh Bank must be ready to
extend this facility further if condition warrants. Credit extended to primary dealers under this facility
may be collateralized by a broad range of debt securities. The interest rate charged will be the primary
credit rate, or discount rate, at the central bank. It is noteworthy that the US Fed is undertaking
open market operations and committed to maintaining the federal fund rate within a target
range of 0─¼ percent. Bangladesh Bank must make it clear that it will continue to purchase
government securities until it achieves the target primary rate. Other policy options include reduction
in cash reserve requirements (CRR) and statutory liquidity ratios (SLRs). Bangladesh Bank can also
direct cash-rich state-owned banks to increase their advance-deposit ratio (ADR) to an enhanced target
level. Bangladesh Bank is well-advised to target repo rate to go down from current 6 percent to 4
percent. The cutoff yield of Treasury Bills auctioned in the second week of March 2020 is however
observed to be in the range of 7-9%. This is totally inconsistent with the dire condition of the economy.
This further indicates Bangladesh Bank is totally divorced from grave reality. The central bank will
need to flush the money market with liquidity so that interest rates subside and lending to the private
sector pick up at the earliest. The central bank can make a number of interventions targeting industries
that are worst hit by the coronavirus pandemic. One key policy directive can be to extend „bridge
loans at the lowest possible interest rate to industries (or even zero-rated for strategic and
vulnerable ones)‟ on the condition that they „keep their workers on payroll regardless of their work‟
for at least three months. The assumption is that effective drugs (or vaccination program) will roll
out and normalcy will return by this time. The United Kingdom Treasury and Bank of England
introduced a lending facility, named the „Covid Corporate Financing Facility (CCCF).‟ CCCF is
designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to
their cash flows through purchase of short-term debt in the form of commercial paper. The U.S.
Federal Reserve Board established Commercial Paper Funding Facility (CPFF) to support credit flow to
households and businesses in the United States. The U.S. Fed also established a Special Purpose
Vehicle (SPV) to directly buy eligible 1 Dr. Mizanur Rahman is a Professor
of Accounting & Public Policy in the University of Dhaka. Dr. Rahman is an EducationUSA Fellow. In
January 2010, the Global Development Network (GDN) awarded him the Luxembourg Ministry of
Finance First Prize for his outstanding 'Research on Development'. E-mail: mizan@du.ac.bd

2 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 can establish similar special purpose
vehicles (SPVs) in order to directly buy corporate debt securities subject to meeting certain conditions.
This special purpose vehicle may also invest in corporate bonds to be listed in stock exchanges.
Bangladesh Bank can negotiate with multilateral development partners, including the World Bank,
ADB, IDB, and IMF, and float a special purpose vehicle of Taka 100,000 Crore to this end. Banks and non-
bank financial institutions that enjoy highest credit rating can access to this low-cost 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. A few credit rating agencies operate in
Bangladesh. Their ratings are however not reliable. An alternative mechanism must be envisaged to
assess borrowers‟ long-term solvency and profitability. The mechanism shall guarantee that funds
shall flow to those firms that can demonstrate they were in sound financial health prior to the
coronavirus shock. Secondly, Bangladesh Bank can issue a directive asking lenders to extend a 12-
month moratorium on their loans and advances that will fall due in a year. This will provide
cushion to firms and corporations to avoid imminent bankruptcy. The UK Treasury in its 2020 budget
further announced a „Coronavirus Business Interruption Loan Scheme (CBILS)‟ and designated British
Business Bank to implement this program for businesses in the UK. The UK scheme provides the
lender with a government-backed guarantee against the outstanding balance, potentially enabling a
„no‟ credit decision from a lender to become a „yes.‟ The government will also cover the first 6
months of interest payments, so businesses will benefit from lower interest payments. The
businesses will remain liable for repayment of the capital. The maximum value of a facility provided
under the UK scheme would be £5 million. CBILS supports a wide range of business finance projects,
including term facilities, overdrafts, invoice finance facilities and asset finance facilities. The eligibility
criteria include that the candidate firm shall have a turnover of no more than £45 per annum, operate
within designated industries, and unable to meet a lender‟s normal lending conditions. Bangladesh
Bank can follow the substance of this CBILS scheme and tailor it incorporating our domestic conditions.
One particular area of consideration is that lending facility should be available for small and medium
enterprises (SMEs) employing less than 200 workers or with an annual turnover of less than Taka 50
Crore. Providing liquidity to households and micro, small and medium enterprises (MSMEs) is a critical
challenge. To this end, Bangladesh Bank can work with microfinance institutions (MFIs). PKSF has an
outreach to about 13 million households including ultra-poor, poor, non-poor and micro-entrepreneurs
across the country. BRAC too is an alternative. PKSF can disburse small loans without collateral through
its partner organizations (i.e., MFIs) that are scattered across the country. A critical problem is to ensure
that this new money goes to MSMEs and low-income & vulnerable households at a very low
interest rate. MFIs are often blamed for subverting government efforts to lower borrowing costs for
microloans. This has to be mitigated. The nation-wide network of state-owned and private
commercial banks banks can also be utilized for channeling low-cost loans to households and
MSMEs. BRAC Bank for example has credible experience of managing large portfolio of loans to MSMEs.
Their experience and infrastructure can be of high relevance. The Ministry of Finance will need to
redefine their fiscal and budgetary supports to support public health and help households and
businesses to cope with this pandemic. A rationalization of entire portfolio of government spending is
an urgent need. GoB must consider discarding non-essential spending including financing of
development projects that are yet to take off. Capital market also requires emergency stimulus.
Bangladesh is certain to experience ballooning current account deficit this year and next year. The
Ministry of Finance and Bangladesh Bank must consider options for managing this surging imbalance.
Devaluation of Taka against the U.S. dollar must be a central element of any solution architecture.

(Rahman, 31 march 2020)