Cash in hand rising for 7 months despite higher deposit rates

Although deposit interest rates have almost doubled within a year, cash in hand or local currency held outside banks has been rising for the past seven months primarily due to stubborn inflationary pressure.

According to central bank data, the amount of taka held by the public, rather than deposited in banks, stood at Tk2.71 lakh crore at the end of May, which was Tk2.46 lakh crore in October 2023.

Since then, the amount of money outside banks has increased every month, with an increase of about Tk25,000 crore over the past seven months, including Tk6,310 crore in May alone.

Managing directors at several private banks have said people's spending has increased significantly due to high inflation, leading to a decrease in their savings.

Consequently, bank deposits have not been growing as expected. Moreover, negative news published about several banks has deterred many people from depositing their money in banks, they added.

The country's inflation in May surged to a seven-month peak of 9.89%, primarily fuelled by rising food prices, according to Bangladesh Bureau of Statistics data. The inflation rate has been over 9% for the last 15 months.

Asked why the amount of money outside banks is increasing, Selim RF Hussain, chairman of the Association of Bankers, Bangladesh, and managing director of BRAC Bank, told The Business Standard that the central bank has introduced several rules so far, including Know Your Customer (KYC), Anti-Money Laundering (AML), and a tightening banking structure.

"While these measures are beneficial for the country as a whole, many individuals are refraining from depositing black or unofficial money in banks due to the increased risk of detection. This reluctance contributes to the accumulation of cash outside banks," he said, expressing concern over the significant amount of cash remaining outside banks.

The seasoned banker further suggested conducting a study on the trend of cash held outside banks over at least one year.

According to data from the Bangladesh Bank, total deposits reached a staggering Tk17 lakh crore in May, marking a year-on-year growth of 8.77%, slightly higher than April. Among them, time deposits increased by 9.76%, while demand deposits rose by 1.36%. Overall deposit growth in April was recorded at 8.63%.

Ali Reza Iftekhar, managing director of Eastern Bank, told BTS that many people are now opting to invest in government bonds instead of depositing money in banks, as the interest rates on bonds are higher than the deposit rates offered by good banks.

"This is one of the reasons for the decline in deposits in the banking sector. However, not all banks are experiencing the same situation. For example, our bank is currently showing good growth despite the deposit growth not meeting our targets," he added.

Senior officials at several banks also pointed out that, in addition to higher interest rates, people perceive investing in Treasury bonds as safer than keeping money in banks. Furthermore, taxes are deducted on bank interest or there are excise duties on deposit limits, whereas investing in bonds does not incur such costs.

Selim RF Hussain said the deposit growth among banks varies significantly; for instance, BRAC Bank has seen a year-on-year deposit growth of around 30%, whereas some Islamic banks have experienced a slowdown in deposit growth.

Additionally, deposits may decrease due to customer confidence issues in many banks, exacerbated by high inflation, leading to increased expenses for people, he added.

The seasoned banker emphasised the need to reduce cash transactions to boost bank deposits and decrease the amount of cash held outside banks.

"We need to focus on enhancing digital banking. Our neighbouring country, India, is gradually moving towards digital transactions, reducing its reliance on cash. This shift to a cashless digital society is the real solution," he suggested.