Prevailing Money Market Situation and

The Way Forward

21 July 2018

Macroeconomic news!

2

An Overview of Money Market

Money Market refers to short term (Generally, less than 1 year) borrowing and lending between Banks and FIs

Interest rate in the market driven by available liquidity in the market

Banks engage in money market generally to manage liquidity as well as to optimize the bank’s profitability within the regulatory parameter, e.g., AD Ratio, Wholesale borrowing limits etc.

Central Bank regulates the money market / Banking system by controlling the money supply in the Banking system. Tools used are: CRR / SLR Ratio, Setting AD Ratio limit, T-bills / Bonds auction, Repo / Reverse Repo window etc.

Current State!

57 scheduled Banks and 34 NBFIs!

PCB AD ratio at 85.8%, exceeded the regulatory ceiling, driven by:

Higher than target private sector credit growth (~19%) than the Deposit growth (~10%).

Increased investment in high cost National Savings Instrument.

Current account deficit putting additional pressure on LCY liquidity as well as on FX rate.

Tight market liquidity driving up the interest rate. Slow down expected in credit growth.

Pressure on Spread and Interest rate reduction continues to keep economic momentum up.

High Non-performing loans posing challenges on the Bank’s solvency!

Primary Reasons for Current Liquidity Situation!

PCB AD ratio at 85.8% as at 31 March 2018, exceeded the regulatory ceiling, mainly due to:

Higher lending growth (18.4%) vs deposit growth (10.2%) drove up the PCB AD Ratio.

Increased money channeling into National Savings Certificates (NSC) due to higher yield (11.3%). ~BDT527bn invested in NSC during 2017.

Withdrawal of deposit by State Owned Corporations (SOCs)

Overcrowded industry with 57 banks (of which 40 PCBs) and the number increasing

Current account deficit putting pressure on exchange rate as well as on LCY liquidity driven by higher import:

Food grains due to flood

Capital machinery for large Infrastructure projects

Petroleum due to price increase.

Interest Rate Reduced to achieve Single Digit Lending Rate!

12.25%

11.00%

8.00% 8.00%

10.00%

12.50%

10.50%

9.00%

8.50%

9.50%

10.99%

7.23%

6.32% 7.17%

7.32%

12.59%

11.04% 11.04% 11.04% 11.04%

Dec 14 Dec-15 Dec-16 Dec-17 Mar-18

1 Yr. TD Rate Corporate Lending Rate 10 Year T-Bond Rate 3 Year NSD rate

7

Resulted in Declining Trend in Investment in T. Bonds

23% 22%

23%

17%

19% 20%

27% 27% 26%

24%

22%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 May-18

Maintained SLR

Funds moved out of T. Bonds went into fund Lending growth!

16.0%

13.4% 13.1% 12.8%

10.2% 10.6%

13.9% 13.3%

15.5%

18.4%

Dec 13 Dec 14 Dec 15 Dec 16 Dec 17

Deposit Growth

Lending Growth

Higher Interest rate on National Savings Certificates diverted funds out of Banking System!

9

89,530 118,440 162,290 215,060 227,950

28,910

32%

43,850

37%

52,770

33%

12,890

6%

Dec 14 Dec-15 Dec-16 Dec-17 Mar-18

Volume (BDT'Cr) Δ Amount & Growth %

Considering ~10,000 crores as the normal annual NSC investments, incremental investments in NSC in 2017 alone account for ~5% of AD ratio for the entire banking system.

Resulted in Regulatory AD ratio breach!

53.5% 52.4% 53.1% 54.6% 56.2%

78.2% 79.5% 85.0% 84.7% 85.8%

71.0% 71.0% 75.5% 75.9% 77.0%

Dec14 Dec-15 Dec-16 Dec-17 Mar-18

SCBs PCBs All

Both Banks and Regulators failed to arrest the issue before it is too late!

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Import Export Remittance

Liquidity situation is further aggravated by significant growth in Import!

-3%

-2%

-3% 10%

5%

5%

20% 8% 10%

12% 5% 14%

35% -5%

3% 10%

4% 5% 2%

8% 8% 20% 28% -9%

Current Account Deficit Means Central Bank had to sell USD and Mop up LCY from Banking System causing more problem!

1,748

2,766

636 1,074

1,806

973 1,750

3,376

(2,183)

(9,380)

(12,000)

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Food grains due to flood

Capital machinery for large Infrastructure projects

Petroleum due to price increase

13

• CRR requirement reduced to 5.5%, from 6.5%.

• Repo rate reduced to 6.0%, from 6.75%.

• Deadline achieve ADR limit of 83.5% pushed to 31 March 2019.

• State owned agencies deposit limit with PCBs to 50% from 25%.

Some Policy Changes! Is it enough?

No Decision yet on reducing the NSC rate, which remains as a major hole in the Financial System!

Spread capped at 4%, would aggravate the situation further coupled with proposed 9% lending rate!

4.36 5.66

2.01

6.2 5.51

8.01 8.98 9.03

10.49 9.96

3.65 3.32

7.02

4.29 4.45

State Owned Banks Specialised Banks Foreign Banks Private Banks All Banks

W. Avg. Deposits

W. Avg. Advances

Spread

4.36 5.66

2.01

6.2 5.51

7.9 8.95 8.68

10.46 9.9

3.54 3.29

6.67

4.26 4.39

State Owned Banks Specialised Banks Foreign Banks Private Banks All Banks

W. Avg. Deposits

W. Avg. Advances

Spread

Excl. Consumer Finance & Credit Card

Interest Rate Spread (Overall)

NPL remains the biggest challenge!

Gross NPL Ratios Dec-16 Dec-17 Mar-18

State Owned Commercial Banks 25.05 26.52 29.84

Specialized Banks 26.02 23.39 23.39

Private Commercial Banks 4.58 4.87 6.00

Foreign Commercial Banks 9.56 7.04 7.01

All Banks 9.23 9.31 10.78

Net NPL Ratios Dec-16 Dec-17 Mar-18

State Owned Commercial Banks 11.06 11.15 14.38

Specialized Banks 10.48 9.69 9.06

Private Commercial Banks 0.14 0.20 0.99

Foreign Commercial Banks 1.91 0.71 0.82

All Banks 2.33 2.20 3.31

Further recognition of NPL and provisioning may mean a Significant capital shortfall in the Industry!

12.54% 12.38% 12.36% 12.52% 12.12%

11.35% 11.84%

10.80% 10.83% 10.11%

Dec 14 Dec-15 Dec-16 Dec-17 Mar-18

Private Commercial Banks All Banks

Further recognition of NPL and provisioning for the same may mean capital shortfall for banks at a time when Banks would be required to raise more capital under Basel III kicking in in 2019.

So, a lot needs to be done….

17

• Reduce NSC rate. People who genuinely need government support may be taken care of differently.

• Strengthen governance and compliance standard amongst banks. Zero tolerance on regulatory compliance by Banks. Banks must adopt ‘fund before you lend’ policy.

• Strict monitoring and enforcement of regulation / guidelines by the Regulator.

• Increase focus on remittance, export as well as taking prohibitive measures to discourage import of non-essential goods.

• Developing alternative funding sources for industry e.g., Bond market, Capital Market etc. for long term sources of fund.

Most Importantly, every future decision has to be well thought through taking into account each and every factors and its implications!

18

Thank you

Yield Curve (T-Bond)

9.59%

5.04%

5.91% 5.90% 5.82%

10.99%

7.23%

6.32%

7.17%

7.32%

11.52%

7.87% 7.64% 7.93%

8.08%

12.05%

8.97%

7.89% 8.25% 8.45%

Dec 14 Dec-15 Dec-16 Dec-17 Mar-18

5 Year 10 Year 15 Year 20 Year

NSC Rate

20

Dec-14 Dec-15 Dec-16 Dec-17 Mar-18

3 Year (%) 12.59% 11.04% 11.04% 11.04% 11.04%

5 Year (%) 13.19% 11.76% 11.76% 11.76% 11.76%

Volume (BDT'Cr) 89,530 118,440 162,290 215,060 227,950

Δ Amount NSC (BDT'Cr) 28,910 43,850 52,770 12,890

PCBs -Interest rates

12.50% 10.50% 9.00% 8.50% 9.50%

12.25%

11.00%

8.00% 8.00%

10.00%

Dec 14 Dec-15 Dec-16 Dec-17 Mar-18

Lending Rate

Deposit Rate

Loans & Deposit

545,150 617,474 713,113 844,436 869,562 658,852 745,023 840,268 926,179 925,280

13%

13%

10%

-0.1%

15%

18%

3%

Dec 14 Dec15 Dec-16 Dec-17 Mar-18

Loans Deposits Deposit Growth Loans Growth