Govt's special bonds for power, fertiliser boost banks' liquidity

Excess liquidity in banks increased by nearly Tk10,000 crore or 5.89% in April compared to March despite the country's banking sector experiencing its lowest deposit growth in ten months.

According to Bangladesh Bank data, excess liquidity in banks was Tk176,662 crore in April, up from Tk166,822 crore in March – an increase of Tk9,840 crore in one month.

Though the growth of bank deposits decreased in April and more money circulated outside banks, overall excess liquidity and cash excess liquidity still increased due to several factors, bankers said.

One of the key reasons was that long-standing dues to banks for fertiliser and electricity have been repaid in bonds by the government after which the banks have reinvested this liquidity in treasury bills and bonds, bankers said.

Since banks are required to maintain a certain amount of their deposits as Statutory Liquidity Ratio (SLR), and investments in various government and private securities count towards this requirement, the recent increase in investments in these government securities has resulted in excess liquidity being counted beyond the SLR requirement.

Banks have been facing a liquidity crisis since 2022 as they purchased over $30 billion from the central bank. This has led to nearly Tk3.75 lakh crore being transferred to the central bank. Additionally, concerns over bank mergers and instances of loan fraud have caused customers to withdraw their money. Inflation has also forced customers to use their savings for household expenses, contributing to slow deposit growth.

To ensure the security of customer deposits, banks are required to maintain a certain amount of cash and investment securities with the central bank. Banks must keep 4% of their cash reserve ratio (CRR) and statutory liquidity requirements (SLR) of 13% for conventional banking and 5.5% for Islamic banks. 

Despite these requirements, the total excess liquid assets (including securities) amounted to Tk176,662 crore at the end of April. In December 2023, banks' excess liquidity was Tk1.63 lakh crore, and in July 2023, it was Tk1.80 lakh crore. 

A senior official of Bangladesh Bank, seeking anonymity, told The Business Standard that a major reason for the increase in banks' excess liquidity is their heavy investment in treasury bills and bonds. Since banks have invested more than required in securities, their excess liquidity has increased.

"Compared to lending, banks find it more comfortable to invest here [treasury bonds]. While loans bring in 11-12% interest, their recovery is uncertain as many borrowers default. However, investing in securities helps banks fulfil their SLR requirements and allows them to liquidate these assets anytime," the official said.

As of April this year, banks' minimum required liquid assets were Tk2,71,052 crore, while total liquid assets were Tk4,37,878 crore, according to Bangladesh Bank data.

In January, the government issued special bonds worth Tk26,000 crore to 40 public and private banks to settle dues in the fertiliser and electricity sectors. The coupon rate or interest rate of these bonds is 8.5%. However, the banks collected these bonds at this rate and lent the government at a higher rate through treasury bills and bonds.

For the first time on 3 June, the interest rate for the one-year treasury bill reached a record 12%, as the government began borrowing at high rates from banks to curb inflation. However, experts have warned that rising interest costs will increase the budget deficit, adding to the government's payment burden.

The interest rate for one-year bills was 7.75% a year ago, according to Bangladesh Bank data. By June, interest rates for all types of bills and bonds had risen to a minimum of 11.30% to 12.55%, compared to 6.75% to 8.5% a year ago.

Meanwhile, banks' excess cash liquidity is also on the rise. At the end of April, it stood at Tk8,409 crore, up from Tk5,581 crore a month earlier. The central bank's data shows that the excess cash liquidity of banks at the end of December 2023 was Tk19,966 crore which was Tk11,701 crore in July 2023.

A managing director of a state-owned bank told TBS that liquidity in banks is increasing due to the government's outstanding subsidy payments, however, the return on investment from customer-level loans remains very low.

"Businessmen are not repaying loans. Many are converting working capital loans into term loans, reducing liquidity inflow to banks," he added.

He further said, "With imports significantly down, production has been disrupted for businesses, causing some small enterprises to drop out of business. Additionally, inflation is nearing 10%, which means people are not increasing their bank deposits. Most of their income is spent on daily necessities."