Isn't it peculiar to hear that bankte which usually represent source of money, is running short of cash? Well, this is exactly what the commercial banks in town are fighting against for almost last couple of months. Lets look a little deeper into banking operations to understand how it maintains cash flow liquidity.

The banking sector of the country is looked after by the Central bank (Bangladesh Bank). As nart of its numerous commitments the central bank supplies to and/or withdraws from, the banking system enough cash to maintain equilibrium in the demand and supply of money.

The various reforms those took place in the financial sector and country's foreign exchange arena from 1991, brought opportunities for huge investments specially in the textile and associated sector. Increased demand for funds put commercial banks under pressure and most of them failed to maintain proper matched asset/llability book. Banks begun to fund their long term assets with short term liabilities that is cheap call money or short term deposits.

On the other hand, com-giercial banks invested heavily

in fixed coupon government bonds, floated to finance term projects for state owned enterprises, as these government bonds qualified for mandatory SLR (Statutory Liquidity Ratio) requirement. Bonds are not readily discountable before maturity.

Huge investments in government sector project, could not flourish timely and thus failed to generate adequate cashflow for loan repayments. Looking at the low interest rate trend in the time of floating these bonds, government did not think necessary to make any provision for payment against these bonds. It was thought that the bonds could be entirely renewed. Foreign aid and disbursement stood below the level of expectation as government annual developmept programme ran heavily out of Its own resources.

This imperfect market situation caused liquidity crunch in the banking sector in last April (1996) when interbank call money rate shot up to all time record high of 26 per cent.

Anticipating this situation the central bank as a lender of last resort came up with an

unioue solution. Commercial banks’ were allowed to hold foreign currency fund with central bank as SLR. without any interest. This gave a temporary ease to the liquidity crises, but only proved to be a means to an end not an end to thf problem, since banks were discouraged due to loss of opportunity (Interest* income) Elus generating foreign currency holding is a problem for the local banks unless it comes from customer base. The central bank also considered rediscount facilities for the really distressed banks. Howdver they (including the economists) were not comfortable with cause of liquidity crises and again attributed it to 111 funds management in the commercial banks.

To bring stability in the country's money market. Bangladesh Bank may encourage commercial banks to develop USD/Taka swap market. Presently, commercial banks cannot borrow low interest bearing US dollar from overseas counterpart and swap it with high interest bearing local Taka. To generate add! tional liquidity in- the system .central bank may cut its cash reserve ratio (CRR). An inter-

bank term money market/forward forex market should also contribute towards improvement of the position.

In order to develop a secondary bond market central bank should facilitate and encourage commercial banks to trade Bangladesh Bank and treasury bills. In the time of crises, central bank may even think of intervening the market by introducing emergency fund on the basis of daily auction. in addition to the existing rediscount facility provided at par with bank rate. A structured Repo (repurchase) market can also ease the situation.

Despite political Instability for more than one year, there is still good prospect for booming Investment.

However, huge government sector borrowing and Imprudent funds management In the banks can again create liquidity problem in the market. Thus, to establish a sound and stable money market (with proper instruments) In the country the government, cen tral bank and the commercial banks wfl) have to work unit edly and prudently.

(The writer works as money market dealer with Standard Chartered Bank).