Bank deposit flow halves as inflation eats away savings

With high inflation eating into people's savings capacity, deposit flow in the banks in the first three months of the current fiscal year declined to half of the same period last year.

The banking sector received deposits of Tk11,000 crore in the July-September quarter, down from Tk25,000 crore in the same period last year, according to data from the Bangladesh Bank.

At the same time, contributions of demand deposits to the total deposit amount declined by Tk11,000 crore in the period, indicating that savers are under spending pressure. Demand deposit account is the type of account from which deposited funds can be withdrawn at any time without advance notice.

High spending amid price pressure also reduced saving capacity as the growth of term deposits – which cannot be withdrawn before a specified time with a guaranteed rate of interest – increased by Tk22,000 crore, which is 35% less compared to the amount of Tk34,000 crore in the same period last year.

Infographic: TBS

Term deposits, which constitute almost half of the total deposits in the banking system, registered the lowest growth in recent years at 7% in September. The growth was double digit until last fiscal year.

The sharp fall in term deposits has put the entire deposit growth of the banking sector under pressure.

The total deposit that grew at a double digit rate in the last fiscal year registered only 7.75% in September, with fuel price hike in August dealing another blow.

The drastic fall in saving certificate sales also reflects the hit of inflation on people's income.

The sale of saving certificates declined by a staggering 96% to Tk330 crore in July-September quarter of current fiscal year from Tk8,558 crore in the same period of the last fiscal year.

Inflation hit 9.5% in August which later came down to 9.1% in September when interest rate on deposits was below 6%.

Bank liquidity under stress

The erosion of the savings capacity of people is already reflected in liquidity indicators of the banking sector.

There has been a sharp fall in excess liquidity by Tk33,000 crore in just three months to Tk1.70 lakh crore in September from Tk2 lakh crore in June, according to Bangladesh Bank data.

Tight liquidity has also made banks cautious in lending causing a slowdown in private sector credit growth.

Private sector credit growth declined slightly to 13.93% in September breaking the rising trend of the previous six months.

The Bangladesh Bank in its monthly report titled "Major Economic Indicators for October" mentioned that excess liquidity declined due to gradual increase in credit demand and central bank's intervention in foreign exchange market by selling dollars.

The Bangladesh Bank mopped up Tk50,000 crore in just four months of the current fiscal year by selling $5 billion dollars to banks, according to central bank data.

At a time when banks are under liquidity stress amid high inflation and dollar shortage, rising default loans have also intensified the crisis.

Default loans increased by over Tk31,000cr

Default loans in the banking sector increased by over Tk31,000 crore in the first nine months of the current year as many businesses have been experiencing production loss amid an energy crisis making them unable to pay back bank money.

The Bangladesh Bank recently issued a press release saying that there is no liquidity crisis in the banking sector. A malicious group was spreading the rumour, according to the central bank statement.

At a press conference held recently over the liquidity situation, Bangladesh Bank's spokesperson and Executive Director GM Abul Kalam Azad said, "If there is any disruption in the liquidity management of a bank, the Bangladesh Bank will take steps to solve it with utmost importance. The central bank's policy of 'Repo and Assured Liquidity Support' is always in place for liquidity management," he added.

The Bangladesh Bank also asked managing directors of banks to work to restore the confidence of their customers regarding liquidity.

Though the central bank assured banks of providing liquidity support through repo, in reality borrowing from the Bangladesh Bank became costly for banks after a hike in the policy rate.

In September, the Bangladesh Bank raised the policy rate for the third time in four months by 25 basis points to 5.75%, aiming to tighten money flow and thus check inflation amid rising credit growth.

The hike in the key interest rate, also known as the repurchase agreement rate, at which banks borrow from the Bangladesh Bank, will make money costlier, discouraging banks from lending.

But bankers, seeking anonymity, commented that The Bangladesh Bank achieved the objective of tightening money flow by raising policy rate but it failed to tame inflation.

On the other hand, money rates picked up amid tight liquidity in the banking sector.

For instance, the Liquidity Coverage Ratio (LCR) declined sharply to 166% in August this year, which was above 200% in the same period last year, according to the Bangladesh Bank data.

However, the ratio is still above the minimum regulatory requirement of 100% which indicates that banks have net cash flow for a minimum of 30 days.

The weighted average call money rate in the inter-bank money market reached 5.79% in October, which was higher than the existing level of repo rate – 5.75% – indicating continued high demand for liquidity in the money market.  The call money rate was within 2% in October last year.

The tight liquidity also made borrowing expensive for the government from the banking system as the yield of treasury bills increased substantially.

The interest rate on treasury bills for more than 10 years increased to above 8% in October this year, while it was between 5-6% in the same period of last year, according to Bangladesh Bank data.

What bankers say

Mashrur Arefin, managing director of City Bank and vice chairman of the Association of Bankers Bangladesh, in an opinion published in a newspaper recently said they are not worried about deposits as banks have excess liquidity of Tk1.70 lakh crore.

"Currently, the total amount of deposits in the country's banks is Tk14.82 lakh crore. Bank liquidity is another name for measuring the ability of returning depositors' money on demand. Our current liquidity is Tk4.16 lakh crore. But according to calculations, the liquidity should have been Tk2.5 lakh crore.

"The governor of the country has informed that there is no liquidity crisis in the banking sector, rather there is excess liquidity. He also said that the dollar crisis that has been created will no longer exist from next January. Still, new deposits are not coming into the bank, rather old deposits are being taken out."

Another top banker, requesting anonymity, said the liquidity crisis does not mean that banks do not have capacity to pay back depositors' money.

He said deposits increased substantially during the pandemic as people could not spend amid movement restrictions. As a result, excess liquidity hit an all-time high of Tk2.31 lakh crore. Now, people are spending high amid high inflation causing a fall in savings. Moreover, credit demand is high due to business expansion during the post pandemic time diminishing excess liquidity faster, he explained.