The recent violence centring the quota reform movement will intensify the crisis of the banking sector already reeling from bad loans, liquidity shortages, lack of capital, bank mergers and irregularities, fear economists.

Unrest, curfew, and internet shutdown have dealt a severe blow to business activities, and local and international transactions, leading to drop in remittance and export related transactions, said sources.

To control the situation that arose nationwide due to the students' quota reform movement, the government imposed a curfew starting from the night of 19 July. Consequently, banks were closed until 22 July. Due to the lack of internet connectivity, online banking transactions were also halted. After several days of suspended transactions, on 24 July banking services resumed on a limited scale, with many banks unable to conduct foreign transactions because of the slow internet.

On 24-25 July, transactions were conducted for only four hours, from 11:00am to 3:00pm, but many traders could not open letters of credits for imports, said sources.

On Sunday to Tuesday this week the Bangladesh Bank instructed banks to keep their branches open from 10:00am to 3:00pm aligning with government office timings. However, bank branches closed by 3:30pm after completing their ancillary office work.

Dr Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told the Daily Sun that, “All economic sectors will see huge losses due to the current volatile situation. During COVID-19 pandemic, we could not go outside of the house, but office work, shopping, and communication could be maintained from home. However, currently we are passing through dual lockdowns – virtual and physical. As a result, it is not possible to recover the damage.”

Banking activities have been severely disrupted. Export, import, remittance, foreign trades – all are dependent on banks. And the crisis is not over yet. Bleeding continues, not stopping. Given the country’s economic condition, it will not be possible to tackle the situation, he added.

Echoing Zahid Hussain, Policy Research Institute Executive Director Ahsan H Mansur said, “The economy is already under pressure. The ongoing unrest will have multiple effects on the banking sector as well as the overall economy. Many clients withdrew their deposits from banks.

“Besides, the current volatile situation has created a negative image regarding the country among foreign buyers. We have to move with the international community. The government should think about these. It should see that such a situation does not arise in future.”

Remittances plummet

According to the Bangladesh Bank data, the country received only $78 crore remittances on 19-24 July. Expatriates sent $1.422 billion on 1-18 July – around $79 million per day on an average. That means the total amount of expatriate income received in six days of unrest is less than the daily average remittance received during the first 18 days of this month.

The internet blackout for five days has affected remittance collection through banks and mobile financial services (MFS), which may put pressure on the country's foreign exchange reserves.

Meanwhile, in protest against the government's crackdown on students during the movement, a section of expatriates have started a campaign to send remittances through informal channels instead of banking channels.

With limited internet access and restricted banking transactions, a further decrease in remittances could put the entire country in jeopardy.

Besides, an increase in the dollar rate could further exacerbate inflation, said people involved in this sector.

To restore stability in the foreign exchange market, the dollar rate was increased by Tk7 in one jump. On 8 May, a “crawling peg” was introduced, setting the intermediate rate of the dollar at Tk117, which was previously Tk110.

Consequently, the dollar rate remained stable between Tk117 and Tk118 and the remittance inflow was increasing. However, new uncertainties have arisen regarding remittances due to the ongoing situation.

Bankers fear rise in default loans, drop in profit

Bankers fear a big drop in their profits as the defaulted loans are likely to increase further due to the curfew and the five-day internet blackout.

At the end of March, total defaulted loans stood at a record Tk182,295 crore, which was 11.10% of total disbursed credit, as per the latest published data of the central bank.

However, the actual volume of bad loans is at least three times the central bank figure, according to industry insiders.

Last week the Bangladesh Bank instructed all the scheduled banks and non-bank financial institutions (NBFIs) not to charge additional fees for delayed loan repayments and deposits in savings schemes installments and credit card bills between 18 July and 25 July if they clear their dues by the end of this month.

Liquidity crisis intensifies

The ongoing volatile situation also led to a cash shortage at ATM booths, while servers of several banks were down because of internet disruptions. Consequently, on the first day of resuming operations on Wednesday, the banks in crisis borrowed Tk29,172 crore to meet the demand.

The Bangladesh Bank lent Tk25,521.40 crore under repo, assured repo, assured liquidity support (ALS)  and Islamic Banks Liquidity Facility (IBLF) to banks and financial institutions to meet cash requirements. The commercial banks borrowed Tk3,651 crore from each other.

This deepened the woe of the banking sector, which had already been suffering from a liquidity crisis for the past two years. Most banks in Bangladesh are becoming increasingly reliant on the call money market and central bank borrowing due to a growing liquidity crisis.

The situation escalated with panic withdrawals following the Bangladesh Bank’s forced merger announcement. Additionally, the high value of the dollar has further strained banks’ finances.

Foreign transactions complications hamper businesses

Local and international transactions were halted due to the internet blackout for five consecutive days, putting the country's commercial banks under pressure regarding import bill payments.

Many foreign banks and vendor organisations are demanding additional funds for the delayed payment of bills, which are being considered as penalties or interest.

Officials involved in foreign trade activities told the Daily Sun that many foreign banks that conduct transactions with Bangladesh have rendered the Bangladeshi banks’ accounts inactive for security reasons.

As a result, no transactions were completed during the shutdown. Although internet and banking services were partially restored on Wednesday, many banks were still unable to carry out international financial transactions.

Most of the banks could not launch the Society for Worldwide Interbank Financial Telecommunications or SWIFT system on that day. As a result, global transactions could not be carried out.

When the banks operated on a limited scale on Wednesday and Thursday, they could only complete cash withdrawals and deposits, but could not open letters of credit (LCs).

Banks’ scale of operation expanded on Sunday to Tuesday of this week, but still many importers could not open LCs for essential goods, luxury goods, and industrial raw materials.