Letter of Submission

Date: September 08, 2012

To
Mr. Anupam Kumar Das
lecturer
Department of Management Studies
University of Chittagong.

Subject: Submission of Term Paper report

Dear sir,

with due respect and humble submission, I like to state that I have completed my
term paper report on “Liquidity crisis in Banking sector and the role of Bangladesh
Bank”. Though it is a new experience, I have tried my level best to gather
information about this topic. Without sincere cooperation and proper guidance of
you, it was not possible for me to prepare this report. For this act of kindness, I am
grateful to you.

I would like to express my gratitude for your kind guidance in completion of the
report assigned to me. I sincerely hope that this report will meet your expectation
and will serve its purposes.

Sincerely yours,

_________________

Sanjoy Kumar Paul

ID No.: 07302007
Session: 2006-07
Department of Management Studies
University of Chittagong.

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 Preface
Preparation of term paper report is one of the important assignments of 4 th year
BBA (Hons.). Mainly our study is limited in theories. This term paper program has
been designed for the students of 4 th year to acquire some practical and special
knowledge. Because it is an important thing that students have some piratical
knowledge about the current business world. In developed countries, business
schools give more preference to practical knowledge. Keeping this view in mind our
curriculum includes “preparation of term paper” in which I had to make this report.
My report is concern about Liquidity crisis in banking sector of Bangladesh and
role of Bangladesh Bank.

During my preparationof report, I tried to acquire the information related to current

scenario of banking sector of Bangladesh. The paper also includes the causes of
liquidity crisis and steps taken by the various commercial bank and Bangladesh Bank
to lessening the liquidity crisis in the banking sector of Bangladesh.

I owe a profound sense of gratitude to my honorable teacher, Mr. Anupam Kumar

Das, Lecturer, Department of Management Studies, University of Chittagong, whose
continuous guidance enable me to complete this report successfully.

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 Acknowledgement
It was very kind desire of the almighty that I, Sanjoy Kumar Paul, have completed
the assigned task within the specified time period. For the fear of sounding like a
vote of thanks speech, I would not possibly thank all of those marvelous people who
have contributed something of themselves directly in preparing this report.

First of all my hearty thanks go to Mr. Anupam Das, Lecturer, Department of

Management Studies, University of Chittagong, for his perseverance and direct
supervision. Without his guidance and valuable advices and suggestions from time
to time, I would be failed to complete the whole thing in a right manner.

I like to express my tributes and gratitude to all of my friends who directly and
indirectly give their assistance in this regard. I am also thankful to my
classmates,employees of the department who helped me in various ways, without
their cooperation, my report could not be prepared in time.

_________________

Mr. Anupam Kumar Das

lecturer
Department of Management Studies
University of Chittagong.

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 Objectives of this study
The main objective of this study is to know and have a clear idea about the liquidity
crisis of banking sector of Bangladesh and the regarding role of Bangladesh Bank.
Along of this objective some other special objectives may be exposed as under:

1. To know about the liquidity management.

2. To ascertain the current scenario of liquidity status of banks.
3. To recognize the causes that creates liquidity crisis in banking sector.
4. To know about the liquidity crisis of several banks.
5. To identify about how the various banks takes counteractive action to satisfy
this situation.
6. And having a look about the role of Bangladesh Bank in this situation.

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 Table of contents
Serial No. Topic Page No

1 Introduction 06

2 Liquidity and liquidity crisis 07

3 Current situation of liquidity crisis 09

4 Causes of recent liquidity crisis of banking sector 12

5 Relationship of liquidity with the reserve and call money rate 14

6 How the banks manage liquidity risk 15

7 How this policy works in the crisis time 16

8 Measures taken by commercial banks 17

9 Role of Bangladesh Bank 20

10 Glossary of terms 22

11 Reference 23

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1. Introduction
Liquidity was an instrumental factor during the recent financial crisis. As
uncertainty led funding sources to evaporate, many banks quickly found
themselves short on cash to cover their obligations as they came due. In
extreme cases, banks in some countries failed or were forced into mergers. As a
result, in the interest of broader financial stability, substantial amounts of
liquidity were provided by authorities in many countries, including Canada and
the United States.i(Bordeleau, E and Graham,C. 2010)

The recent liquidity crisis has underlined the importance of sound bank liquidity
management. In response, regulators are devising new liquidity standards with
the aim of making the financial system more stable and resilient. In the
aftermath of the crisis, there is a general sense that banks had not fully
appreciated theimportance of liquidity risk management and the implications of
such risk for the bank itself. Policymakers have suggested that banks should
holdmore liquid assets than in the past, to help self‐insure against potential
liquidity or fundingdifficulties.

Since liquid assets such as cash and government securities generally have a
relatively low return, holding them imposes an opportunity cost on a bank. In
the absence of regulation, it is reasonable to expect banks will hold liquid assets
to the extent they help to maximize the firm’s profitability. Beyond this,
policymakers have the option to require larger holdings of liquid assets, for
instance, if it is seen as a benefit to the stability of the overall financial system.

The aim of this paper is to have a glimpse at the status of liquidity crisis suffered
by the banks and the measures they have taken to overcome it with the support
of Bangladesh bank.

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2. Liquidity and liquidity crisis

Liquidity is the amount of capital that is available for investment. It is also known as
"marketability".ii(Liquidity, 2009)

The degree to which an asset or security can be bought or sold in the market
without affecting the asset's price. Liquidity is characterized by a high level of
trading activity. Assets that can be easily bought or sold are known as liquid assets. iii
(Liquidity, 2009)

Today, most of this capital is credit, not cash. That is because the large financial
institutions that do most investments prefer using borrowed money. High liquidity
means there is a lot of capital because interest rates are low, and so capital is easily
available. Interest rates are so important in controlling liquidity. These rates really
dictate how expensive it is to borrow. Low interest rates mean credit is cheap, so
businesses and investors are more likely to borrow.

The return on investment only has to be higher than the interest rate, so more
investments look good. In this way, high liquidity spurs economic growth.  However,
a liquidity surplus can develop if there is really too much capital looking for too few
investments.

This is usually a precursor to inflation. As cheap money chases fewer and fewer
good ventures-- or houses, or gold, or barrels of oil, or high tech companies then
the prices of those assets increase.This leads to "irrational exuberance.” Eventually,
a liquidity surplus means more of this capital becomes invested in bad projects. As
the ventures go defunct and do not pay out their promised return, investors are left
holding worthless assets. Panic ensues, resulting in a withdrawal of investment
money. Prices plummet, as investors scramble madly to sell. This is what happened
with mortgage-backed securities during the2007 Banking Liquidity Crisis. This phase

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of the business cycle, known as contraction, usually leads to a recession.
Constrained liquidity means there is not a lot of capital available, or that it
isexpensive. Banks and other lenders are hesitant about making loans. It is usually a
result of high interest rates.

Liquidity crisis is a negative financial situation characterized by a lack of cash flow.

For a single business, a liquidity crisis occurs when the otherwise solvent business
does not have the liquid assets (i.e., cash) necessary to meet its short-term
obligations, such as repaying its loans, paying its bills and paying its employees. If
the liquidity crisis is not solved, the company must declare bankruptcy. An insolvent
business can also have a liquidity crisis, but in this case, restoring cash flow will not
prevent the business's ultimate bankruptcy.iv(Liquidity crisis, 2009)

For the economy as a whole, a liquidity crisis means that the two main sources of
liquidity in the economy, banks and the commercial paper market, severely reduce
the number of loans they make or stop making loans altogether. Because so many
companies rely on these loans to meet their short-term obligations, this lack of
lending has a ripple effect throughout the economy, causing liquidity crises at a
plethora of individual companies, which in turn affects individuals.

3. Current scenario of liquidity crisisv(18 banks face acute

liquidity crisis, 2012)

Some banks desperate in getting cash, driving call money rate high. Among the non-
bank financial institutions (FIs), eight are reeling under the liquidity crisis, while 15
others are lending to the call money market regularly, meaning that the latter's
status of liquidity is relatively better.

Bangladesh Bank governor DrAtiurRahman, while announcing the monetary policy

for the second half of the current financial year, said that the important role of the
central bank was to protect banks from being affected by liquidity crisis.

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"High borrowing by the government from the banking system in recent months has
triggered pressure on liquidity, but the central bank injected cash into banks
through using Repo (one of two vital instruments to control money supply) to help
banks avoid deterioration in liquidity status," he added.

An official of the central bank, seeking anonymity, said that the liquidity status
reached such a proportion that some banks had become desperate in getting cash,
driving the call money rate to rise.

“To check abnormal rise in call money rate, the central bank is executing a cap, 20
per cent for banks and 22 per cent for the FIs. And, most of the transaction is being
processed within the cap,” he added.

According to BB data from January 1 to January 23, state-owned Agrani Bank

Limited topped the list of banks gone for overnight borrowing from the call money
market. On average, this bank has borrowed over Tk. 300 crore every working day.
Another state-owned bank, Sonali Bank Limited, remains in the next position as it
borrowed about Tk. 250 crore daily. Within this period, the aggregated amount of
borrowing by these two banks are Tk. 5,054 crore (Agrani) and Tk. 4,217 crore
(Sonali).

However, two other state-owned banks — Janata Bank Ltd and Rupali Bank Ltd —
have lent to the call money market on a regular basis. Within this period, Janata
Bank lent Tk. 15,334 crore while Rupali Bank lent Tk. 1,698 crore.

Among private banks, big lenders were Basic Bank Ltd (lending amount Tk. 11,894
crore), United Commercial Bank Ltd (Tk. 8,769 crore), Pubali Bank Ltd (Tk. 6,825
crore), Dutch Bangla Bank Ltd (Tk. 5,434 crore), The Trust Bank Ltd, Bank Al-Falah,
Premier Bank Ltd, One Bank Ltd and Bangladesh Development Bank.

Two foreign banks that went for regular borrowing from the call money market are
Bank Asia Limited and National Bank of Pakistan.

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Among foreign banks, Commercial Bank of Ceylon, Citibank NA, Habib Bank Limited,
Honkong Shanghai Banking Corporation, Standard Chartered Bank, State Bank of
India and Woori Bank have lent to the call money market.

Borrowing and lending are almost parallel for The City Bank Ltd (aggregated lending
Tk. 2,391 crore and borrowing Tk. 2,955 crore) and Standard Bank Ltd (borrowing
Tk. 1,060.50 crore and lending Tk. 1,133 crore).

Meanwhile, FIs, such as, International Leasing, Lanka Bangla, Peoples Leasing, Prime
Finance, Union Capital, Reliance Finance Ltd, ICB Islamic Bank Ltd and BIFC, are
facing acute liquidity crisis.

However, other FIs like BAY Leasing, Delta Brac Housing, Far East Finance, IDLC BD
Ltd, IIDFC, IPDC, National Housing, Uttara Finance, MIDAS, GSP Finance, Premier
Leasing, United Leasing, IDCOL(Infrastructure Dev. Co.) and Grameen Bank, have
regularly lent money to the call money market. Such financial institutions enjoy
liquidity status slightly better than the others.

Page | 10
 Current situation of growth of deposit in various
banksvi(Severe liquidity crisis in the banking sector grew Fear, 2012)

BANK Deposit growth in FY 2011-12

CITY BANK LTD - 4.94

UCBL - 3.21

ICB ISLAMI BANK LTD - 0.81

SOUTHEAST BANK LTD - 0.28

DUTCH BANGLA BANK LTD - 1.43
STANDARD CHARTERED BANK LTD - 2.99
BANGLADESH COMMERCE BANK LTD - 7.79
BANK ASIA LTD - 1.58

BRAC BANK LTD - 0.75

SONALI BANK - 3.76

AGRANI BANK - 5.46

JANATA BANK - 5.83

PUBALI BANK - 0.63

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4. Causes of recent liquidity crisis of banking sector
Liquidity refers to the supply of the means of payments of an economy. In
Bangladesh, the totality of liquidity is indicated by what is called 'broad money'. A
shortage of money restricts demand by making it more difficult to engage in
transactions. Investment is particularly susceptible to liquidity. Now the main
causes of liquidity crisis of banking sector are given below:

In the recent year, our country has experienced a decline in the value of Tk against
US currency which has created has huge liquidity crisis in the banking sector. For
this reason, our country has failed to collect maximum amount of US dollar required
to open letter of credit (LC) for local businesspersons to import essential
commodities for the country. As a result, the importer is facing a severe crisis in
their business.

The banks need to reserve huge amount of money with the Bangladesh Bank, as it is
mandatory for them to maintain the CRR and SLR. BB has recently increased the
rate of CRR and SLR as a result the problem of liquidity crisis has been aggravated
recently. The central bank during last December raised the cash reserve
requirement (CRR) by six percent for commercial bank.
 
As the increased percentage of CRR and SLR the commercial bank is facing liquidity
problem and for this reason to get rid of the problem this banks are concentrated to
generate more deposits. To generate more deposits they have to increase the
deposit rate, which has an adverse effect in the society.
 
Government credit from banking sector that would create extra burden to the
country is banking sector and it creates more liquidity crisis in that sector. the
government has already borrowed Tk 110 billion from the country’s banking sector
to meet the existing budget deficit during last 10months (July 2010 to April 2011),
while last year it repaid Tk 87.92 billion loans. In the recent future, the commercial

Page | 12
banks will be unable to provide loan to the private sector.If the bankers do not
abide by the norms of the central bank and lend out money un judiciously, there
arises the problem with liquidity.The abnormal long-term finance and unsatisfactory
recovery position of short-, medium- and long-term loans will adversely affect the
liquidity situation.
 
The liquidity crisis of the banking sector has been accelerated by the increased
amount of inflation; thus increasing the price of overall commodities for the general
people. To keep peace with this inflationary effect, the people withdraw their
savings from the banks and use this fund for their transactionary expenditure. As a
result, the bank faces liquidity crisis.

The reason of liquidity crisis, if any persisting in the financial sector may be the non-
recovery of loans. The overall percentage of recovery of loan is very alarming. By
now the state-owned banks have taken many steps to recover their old loans but
could not show any improvement.The state-owned public limited companies should
give due consideration to waiver of interest. However, the businesspersons or
traders who failed to repay loans due to various reasons cannot afford to bear the
burden of huge interest and suit costs.
 
In yearly period, the commercial banks perform activities of investment banks, and
for investment banks to also perform activities of commercial banks (i.e. to borrow
short and to lend long). As a result, there is a combination problem of liquidity risk
and credit risk and the problembecomes more uncontrollable and
severe.Overexposure in deposit-lending ratio, credit to deposit ratio (CDR) is
causing the liquidity crisis of the private commercial banks (PCBs). Besides to make
Page | 01
windfall profit and engaged in unhealthy competition amongst the banks leading
the banking into a deep crisis. Although the Bangladesh Bankhas set June 30 as
deadline for bringing down to CDR to a rational level, still many of the private banks
are lagging behind to maintain it.

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5. Relationship of liquidity with the reserve and call
money rate
Excess reserve with Bangladesh Bank has been decreased by BDT70 billion in first six
months, indicating an active money market. The excess reserve is hard cash
deposited by banks in addition to cash reserve requirements, and it lies idle with
the central bank and bears no return. Repo and reverse repo rate were both raised
by 50 basis points to 6%and 4% respectively, causing liquidity to drop.
 
Call money rate rose to double digit in December 2010 mainly due to increased
demand for fresh funds in the inter-bank money market. The demand for fresh
funds was slightly higher on the day following the increment of cash reserve
requirement (CRR) by the central bank to curb inflationary pressure on the
economy. Under the new rules, the commercial banks will have to maintain a CRR
of 6.00% instead of the previous 5.5%with the central bank from their total demand
and time liabilities on a bi-weekly basis.vii (Banking sector outlook 2011-12, 2012)
 
The proposed budget created a liquidity crisis in the banking sector due to its over-
reliance on domestic borrowing for implementing the annual development
program. If the government borrows hugely for implementing the ADP, the
industrial sector will not get enough loans from the banking system, which will
ultimately lead to a higher bank interest rate. In the budget for the next fiscal year,
the government proposed bank borrowing of Tk 18,957 crore for meeting the deficit
and spending in different sectors. Raising the tax at source to 1.5 percent from 0.40
percent will hamper the country's exports.

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6. How banks manage liquidity riskviii(Liquidity crisis - look from
inside, n.d)
Liquidity risk management is a crucial area of risk control that is not covered by the
original Basel II accord. Liquidity Risk is the risk of not being able to meet obligations
when they come due because it cannot: Liquidate assets or obtain adequate
funding, this is called "funding liquidity risk". Easily unwind or offset specific
exposures without significantly lowering market prices because of inadequate
market depth or market disruptions, which is called "market liquidity risk".The dual
definition of the liquidity risk helps in understanding the nature of the risks; while
funding liquidity risk focuses on company specific funding problems; market
liquidity risk describes general market liquidity disruptions. The core of the liquidity
risk strategy of a commercial bank must include following main components:
 
1. Regular monitoring of net funding position and net funding gap of the bank; The
Treasury monitors all maturing cash flows, replenishes existing funds as they
mature, monitors expected withdrawals from retail current and savings
accounts and makes additional borrowings and regularly issues new debt
Diversification of funding sources; The bank should possess well diversified
funding sources including customer current accounts credit balances, savings
and retail deposits and inter-bank deposits.
 
2. Broad portfolio of highly liquid assets; The bank has to maintain a broad
portfolio of highly liquid or marketable assets that can be easily used to obtain
cash. These assets can provide liquidity through repurchase agreements or
through sale.
 
3. Matching long-term funding (over 12 months).Fixed rate funding over 12
months and/or interest swaps (converting fixed rate liabilities over 12 months in
floating rate liabilities).

Page | 15
4. Set up quantitative limits and the limit structure.
5. Set up clear crisis organization structure and escalation procedure.
6. Tested and up-to-date contingency funding plans; The contingency plans should
address temporary and long-term liquidity disruptions caused by a crisis. These
plans ensure that all roles and responsibilities are clearly defined.

7. How this policy works in the crisis time ix(Popular Risk

management, n.d )

Scenario 1:
A short-time funding crisis related to a market event. The preferred order of
generating liquidity in times of crisis is:

1. Determine per position the financial instruments available for generating

liquidity during the crisis: An important element in this determination is the
collateral position that must be held in times of crisis at the different central
banks for supporting the payments system. The following trade off should be
considered:

 Putting too much collateral at Central banks solves payment system

issues but limits the secured funding possibilities with the money
market.

 Putting collateral at work through repo (repurchase agreement) keeps

financing secured but risks the payment system.

2. Unsecured professional funding.

3. Secured professional funding: Non-eligible assets in the professional repo

market or through sale.Eligible assets in the professional repo market or

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 through sale. Central Bank funding (secured) through open market
transactions (if available):
a. Main Refinancing Operations (short term)
b. Longer-term Refinancing Operations.
c. Ad-hoc ‘fine-tuning’ or ‘structural operations’ of Central Banks
 
4. Funding through the Standing Facilities of the Central Bank (Lombard rate).
5. Funding through ‘emergency funding’ possibilities with the Central Bank
(non-eligible collateral).

Scenario 2:
In case of liquidity crisis is more severe and when it lasts for a longer banks begin to
-
1. Price deposits more aggressively. (Watch out for the banks that promote
their deposit products with unbelievable high interest rates)
2. Reduce asset origination.
3. Raise term debt.
4. Raise equity.

8. Measures taken by commercial banks

The Commercial banks have recently launched fund-collection campaigns by
offering new saving schemes with higher interest rates in a bid to tackle the
prevailing liquidity crisis. They are offering higher interest rates to lure people to
keep their savings in the banks. Funds are needed to ward off liquidity crisis the
banks are currently facing. A collapse of the country’s capital market has also
pushed the banks to go for collecting more deposits.

Prime Bank recently offered two fixed deposit schemes. Lakhpoti deposit scheme
and Prime millionaire scheme with interest rate ranging up to 13.50 per cent. The
bank has also launched a double benefit scheme, which offers double the amount

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of saving after six years. The new deposit schemes introduced by Standard Bank are
Standard Bank regular income program, three yearly program, double income plus
program, which offers to return double the amount of saving of five or 10 lakh taka
after six years, Lakhpoti Plus of two- to 10-year terms, and Millionaire program of
three- to 13-year terms.x(Prime bank, 2011)

BRAC Bank introduced SME fixed deposit scheme in April 2011, which offers
payment of interest after three and six months.xi(Brac bank, 2011)

Eastern Bank launched a new deposit scheme named ‘SME Equity Builder’ in April,
offering to provide monthly interest on the savings amount.xii(EBL, 2011)

NCC Bank has introduced double money scheme, offering a return double the
savings amount after six years, special savings scheme of five- or 10-year term with
higher interest, and Special Amanat scheme of 3-year tenure, which will provide Tk
1,000 as profit for Tk 1 lakh deposit.xiii (NCC bank, 2011)

Jamuna Bank has launched a number of saving schemes with new interest rates and
facilities. It is offering Kotipoti deposit scheme of 10 to 18-year tenures, double
increase scheme, offering a return double the savings amount after five, eight, and
10 years, and triple increase scheme, offering a return triple the savings amount of
Tk 10,000 or more after nine years. The bank will provide free debit cards to anyone
who will open a deposit account. The banks had always been trying to support their
clients. The new deposit schemes will boost the banks’ confidence and the clients
will be benefited. But the high deposit rate will create a pressure on the banks to
increase their lending rates.

ShahjalalIslami Bank has introduced double income scheme, which offers to return
double the amount of saving after six years. The bank has also rescheduled its

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12existing deposit products by increasing the interest rates to a maximum of 14
percent.

The Bangladesh Bank’s move to increase the banks’ cash-reserve ratio compelled
them to initiate more deposit programs with higher interests.

Contribution of bond market:The bond market is a financial market where

participants buy and sell debt securities, usually in the form of bonds. Like
emerging-market countries around the world, Bangladesh could benefit from having
a local-currency, fixed-income securities market. At present, its main fixed-income
financial products are bank deposits, bank loans, government savings certificates,
term loans, treasury bills, and government bonds and corporate debt (syndicated
loans, private placement, and debentures). Ingeneral, the corporate debt market is
still very small compared with the equity market. Numerous factors in Bangladesh
today suggest that Bangladesh will not be able to develop an active, local-currency
fixed-income market. Ideally, countries should try to build both primary and
secondary markets for bonds. Primary markets reduce the three risks noted;
secondary markets, by adding liquidity and broadening the investor base, help
reduce funding costs.

9. Role of Bangladesh Bankxiv(Recent Reform Initiatives, 2012)

The monetary policy by the Bangladesh Bank is tailored to maintaining reasonable
price level. It also regulates the cost and availably of domestic credits to the priority
sector at the same time that can increase investments. Monetary policy can be both
expansionary and contrarary. It is contingent upon the expansion/contraction of the
total supply of money. In the context of high unemployment rate, expansionary
policy is applied to increase production. On the other hand, contractionary
monetary policy, conventionally, is applied, if prices are destabilized. Recently,
Bangladesh Bank has declared its six-monthly Monetary Policy Statement (MPS) and
adopted contractionary monetary policy to reduce the stress of the existing liquidity

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pressure and contain inflationary pressure. For continuous high inflation, people
need more money for consumption. Increase in domestic credit and import
payment and deficit in trade balance results into rising of demand of both domestic
and foreign currency. For these reasons, commercial banks are facing liquidity
pressure from December 2010. Therefore, the currency outside the banks and
currency in tills are increasing simultaneously.

To meet up the objectives of the MPS, both REPO and Reverse REPO are used. Due
to the increase in the world price of food and oil, the pressure of inflation is
increasing in Bangladesh. There has been increased pressure of demand both in
domestic taka and foreign exchange markets rather sharply in FY 2011. While
workers’ remittance inflows are slowed down, trade deficit increases for the import
growth and declining in capital account inflows creates the stress on taka and
foreign exchange markets. In this situation, Bangladesh Bank has enhanced the
REPO 50 basis point at once and Reverse REPO interest hikes in total 255 basis
points in four steps.

Yet the central bank has not been able to maintain its target. The apparent
divergence between key targets and outcomes seems to occur with unfailing
regularity raising the issue of credibility and realism in target setting. Target set by
previous MPS’ could not reign in. The inflation rate in FY 2011 was 8.85 against the
target of 6.5 percent. Board money increased by 5.8 percent than that of the target
of 15.2 percent and same difference prevailed for domestic credit, credit to public
and private sector. Under the business as usual scenario, it is evident that the
targets set in the Monetary Policy Statement (July-December 2011) may left far
behind than the actual.

Central Bank controls the liquidity position in the economy by the Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR). In the recent monetary policy,
central bank as increased the CRR and SLR ratio. Increase of excessive investments

Page | 20
in the unproductive sectors such as consumer products and luxurious goods, real
estate, and the capital markets etc. creates the stress on liquidity. In this situation,
central bank is supplying liquidity help by REPO.

As of June 2010, the total liquid assets of the schedule banks were Tk. 87196.61
crore. By the end of June 2011, this went up by Tk. 100564.96 crore. Currently, the
amount of required liquidity SLR is BDT 66493.75 crore. The excess liquidity of the
schedule banks decreased by Tk. 34071.21 core in June 2011 against BDT 34498.73
crore in June 2010 that means it decreased by 1.23 percent in 2011. Banks hold
cash in tills and the excess cash reserves with the BB (which is around 10 percent of
total liquidity) to meet immediate cash withdrawal needs of customers. Balance
with Bangladesh Bank and unencumbered approved securities that are 6.58, 36.10
and 57.32 percent of the total liquidity assets.

At present CRR ratio is 6% and SLR is 18.5% for all scheduled commercial banks of
Bangladesh. If Bangladesh Bank decreases the CRR and SLR then banks will get a
huge amount of money which will help to solve the liquidity crisis many part. At last,
we can say that positive role of Bangladesh Bank, calculative measure of all other
banks and a strong bond market can solve the current liquidity crisis in Bangladesh.

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10. Glossary of terms
FI – Non bank financial institution.
BB- Bangladesh Bank.
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
the BB. If the central bank decides to increase the CRR, the available amount with
the banks comes down.

Repo rateis the rate at which the BB lends money to commercial banks. It is an

instrument of monetary policy. Whenever banks have any shortage of funds they
can borrow from the BB. 

Reverse Repo rate is the rate at which the BB borrows money from commercial
banks. Banks are always happy to lend money to the BB since their money is in safe
hands with a good interest.

Statutory Liquidity Ratio (SLR) Apart from keeping a portion of deposits with the BB
as cash, banks are also required to maintain a minimum percentage of deposits with
them at the end of every business day, in the form of gold, cash, govt. bonds or
other approved securities. This minimum percentage is calledStatutory Liquidity
Ratio (SLR).

Credit to Deposit Ratio (CDR)A commonly used statistic for assessing a bank's
liquidity by dividing the banks total loans by its total deposits. This number, also
known as the LTD ratio, is expressed as a percentage. If the ratio is too high, it
means that banks might not have enough liquidity to cover any unforeseen fund
requirements; if the ratio is too low, banks may not be earning as much as they
could be.

Cash Reserve Ratio (CRR)The portion (expressed as a percent) of depositors'

balances, banks must have on hand as cash. This is a requirement determined by
the country's central bank, which in the U.S. is the Federal Reserve. The reserve
ratio affects the money supply in a country.

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11. Reference

Page | 23
i
Bordeleau, E and Graham,C. (2010).  The Impact of  Liquidity  on  Bank  Profitability.Retrieved
August 30, 2012, from www.bankofcanada.ca/wp-content/uploads/.../wp10-38.pdf

ii
Liquidity.(2009)Retrieved August 30, 2012.from
www.financialdictionary.thefreedictionary.com/liquidity

iii
Liquidity.(2009)Retrieved August 30, 2012 from www.investopedia.com/terms/l/liquidity.asp

iv
Liquidity crisis.(2009) Retrieved August 30, 2012 from www.investopedia.com/terms/l/Liquidity-
Crisis.asp

v
(2012, January28). 18 banks face acute liquidity crisis. Retrieved August 30,2012, from
www.news.priyo.com/.../18-banks-face-acute-liquidity-46038.html

vi
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