Less money in banks, more in people’s hands

Customers withdrew about Tk 65 billion in December 2023, thus cash outside the banks reached about Tk 2.55 trillion at the end of December, according to monthly data from Bangladesh Bank.

Bankers said cash transactions increased in December ahead of the national election in January. Besides, people are spending their savings due to high inflation. Many people also travel home and abroad, requiring more cash transactions. Altogether, December saw more cash withdrawals, but this money will return to banks in the coming days after circulating in various hands.

Meanwhile, banks started increasing interest on deposits as the interest cap on bank lending was lifted in July 2023. Yet, banks are receiving deposits as desired. Some banks even saw their customers taking more money out of banks than they deposit.

Besides, the banking sector fell short of taka as Bangladesh Bank purchased US dollars spending taka. Banks also increased investment in treasury bills, resulting in a liquidity crisis in most of the banks. In particular, two traditional banks and five Shariah-based banks were the worst hit.

Former Bangladesh Bank governor Salehuddin Ahmed told Prothom Alo on Monday, “People are spending money after withdrawing cash from banks due to high inflation. There is no sign of inflation dropping in the coming days. Many people are even withdrawing money due to uncertainty because the situation gets worse in several banks. Several financial institutions can also return customers’ money. Amid such circumstances, many people are withdrawing money from banks and investing in lands and apartments, and this situation is not a good sign for the economy.”

The central bank must establish strong control to improve the state of the banking sector. None will be spared from maintaining rules. This will increase people’s trust in banks and the entire sector will recover slowly, he added.

According to Bangladesh Bank, the amount of reserve money or printed money at banks increased by Tk 319.85 billion to over TK 3.72 trillion in December from over Tk 3.40 trillion in November. A major portion of the reserved money remains in people’s hands and banks’ vaults while the remaining portion is kept in Bangladesh Bank’s vaults.

As cash outside banks surged, money in commercial banks’ vaults dropped to Tk 247.90 billion in last December from Tk 260.69 billion in November. On the other hand, money in Bangladesh Bank’s vaults soared to Tk 926.65 billion in December 2023 from Tk 658.59 billion in November of that year. Cash in people’s hands reached about Tk 2.55 trillion in December last year, which was about Tk 2.48 trillion in November.

Policy Research Institute (PRI) executive director Ahsan H Mansur told Prothom Alo, “Cash outside banks mainly surged for election. Candidates spent this money on various purposes across the country. This money will return to banks again. Besides, people are also spending their savings to meet daily expenses due to high inflation. Some people are also withdrawing money due to mismanagement in the banking sector. Now banks have increased interest on deposits, and this money will return to banks.”

Bangladesh Bank lifted the 9 per cent cap on lending in July and introduced a new lending rate or reference rate, known as the ‘SMART’ (six-month moving average rate of Treasury bill). Banks added an additional 3.75 per cent on ‘SMART’ and fixed the lending rate at 12.43 per cent.

Likewise, deposit interest rates also increased with some banks collecting deposits at an interest of over 9 per cent.

According to Bangladesh Bank data, bank deposits rose by Tk 133.06 billion to over Tk 16.54 trillion in December 2023 from Tk 16.41 trillion in November 2023 while bank lending also increased by Tk 279.35 billion to over Tk 16.93 trillion in December last year from Tk 15.65 trillion in November last year. As a result, a liquidity crisis hit the banking sector.

IFIC Bank managing director Mohammad Shah Alam Sarwar told Prothom Alo, “December was the deadline to repay loans, which is why many people spend deposits to pay loans. As a result, deposits did not increase. On the other hand, the use of cash spiked due to the election, and that might be a reason for cash going outside banks. However, this money will return to banks.”

Money that people withdraw from banks and did not deposit afterwards is known as cash outside banks. People use this money for daily needs or invest in the non-banking sector for higher profit. Some people even keep money at home.