Where does the liquidity go? 

The growth of deposits in the banking sector has decreased by 7.74 per cent in September while the loan growth was 11.85 per cent. The banks are spending more on loans in comparison to the inflow of deposits. Besides, an extra amount of money is going out of the banking system for buying dollars, remittances and encashing export bills. 

Many are cashing their previous savings while the amount of new savings in the banks has decreased. The traders have reduced loan repayments citing slowdown in business, which is eventually pushing up the defaulted loans.   

The Bangladesh Bank sold a total of USD 7.62 billion from its forex reserve in the previous fiscal year (2021-22). The selling spree continued in the current year as the financial sector regulator has so far offloaded USD 5.57 billion from the forex reserve in FY23. On the whole, it released a total of USD 13.19 billion dollars in the market in the last 15 months. 

Against the released dollars, the Bangladesh Bank received a total of Tk 1250 billion from other commercial banks, as per an exchange rate of Tk 95 per dollar. 

The amount of reserve or printed money was Tk 3,480 billion in June last year, but it dropped to Tk 3471 billion in June this year. The figure shrank further to Tk 3,400 billion in September. 

Of the latest amount, the currency with public and bank vaults amounted to Tk 2,616 billion. The amount of currency in the hands of people is rising day by day and stood at Tk 2,399 billion in September, while Tk 2,096 billion was recorded in the previous year’s same month. 

It denotes that the people are withdrawing more cash than before. 

The lower the amount of cash and money outside the banks, is the faster the economy of the country. The money outside the banking system does not play an effective role in the economy.

Taka gets pricier

Many banks have increased the interest rate on deposits amid the rising demand for taka. The weaker and more demanding a bank is, the higher is its interest. The banks have brought special arrangements to collect deposits during this trying time and encouraged the officials to step up their efforts.

They even are receiving deposits from various government and private organisations at an interest rate of up to 8 per cent, though the maximum loan interest is fixed at 9 per cent. 

Questions arose as to how the banks, who attract deposits with 8 per cent interest, are running their business. There remains an operation cost alongside the spending on interest. Also, the banks have to make profit. 

The banks are even counting as maximum as 6.25 per cent in interest in cases of call money among themselves. The call money rate was 4.25 per cent in the previous year. The interest on borrowing money for a 7-day period has gone up to 10 and a half per cent.

The Bangladesh Bank has geared up its regular loan assistance to other banks under the repo facility. It is even providing liquidity support at an interest rate of 5.75 per cent. 

The central bank lent Tk 118.7 billion to other banks on Thursday. 

Social Islami Bank managing director Zafar Alam said, “We have already increased the profit rate on some deposit products due to inflation. Hopefully, the investment profit rate will also rise.”

Liquidity situation

Different individuals, institutions, and government agencies deposit money in the banks. To ensure security of the deposits, the banks have to keep 17 per cent of the total amount in the Bangladesh Bank, as per cash reserve ratio (CRR) and statutory liquidity ratio (SLR) rules. The ratio is 9.5 per cent for the Islamic banks. 

A bank provides loans from the deposits it receives. The conventional banks are allowed to provide Tk 87 in loan against a deposit of Tk 100 while the amount is Tk 92 for the Islamic banks. 

The deposits in banks were totaled at Tk 16,240 billion, including inter-bank and government funds, on 30 June while the amount of loans was Tk 13,207 billion. 

The deposits dropped to Tk 16,055 billion on 28 July, but the loans rose to Tk 13,219 billion. 

On 29 September, the deposits increased again to Tk 16,284 billion when the loans were Tk 13,518 billion. 

However, net deposits in the banking sector, excluding inter-bank and government funds, were Tk 14,821 billion in September when the loans amounted to Tk 17,343 billion. 

Bangladesh Bank spokesperson Abul Kalam Azad said currently there is an excess liquidity of Tk 1,695 billion in the banking system. The central bank is lending money regularly and there is no liquidity crunch.

Former Bangladesh Bank governor Salehuddin Ahmed said it is normal that people will reduce savings amid the ongoing crisis. On the flip side, the government is borrowing and the banks are buying dollars. There will definitely be a demand for taka. 

However, such a situation has been created in the banking sector due to the 9 and 6 per cent interest rates. Apart from this, the banks can buy dollars through repo and their failure to do so has eventually put the liquidity under pressure, he added. 

The economist also noted that the deposits would rise again if the interest rate is hiked.