Inflationary pressure drags April deposit growth down to 8.21%

Despite signs of improving public confidence in the banking sector, deposit growth in April declined by 30 basis points compared to March due to inflationary pressure.

In March, deposit growth peaked at 8.51%, the highest since August last year.

According to Bangladesh Bank data, total deposits in the banking system stood at Tk18.20 lakh crore at the end of April, which is 8.21% higher compared to the same month last year. 

In April 2024, the total deposit in the banking system was Tk16.81 lakh crore.

Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank, told The Business Standard, "Although inflationary pressure has eased compared to previous months, it remains high overall. As a result, people are being forced to spend more, which is limiting their ability to increase their savings."

Mahbubur also pointed to the slowdown in economic activity as a major factor behind the sluggish deposit growth. "Right now, our overall economic activity has declined significantly, which has led to less money circulating in the market. If money isn't moving, how can deposits grow?" he remarked.

Talking to TBS, senior officials from several banks said prolonged inflation, driven by irregularities in the banking sector, central bank money printing, and rising dollar prices, has kept inflation rates above 9% for more than two years. Although inflation slightly eased in April and May, it still remains above that threshold.

As a result, households are spending a larger share of their income on daily necessities. Many families are even dipping into their existing savings and withdrawing deposits to meet their needs, they added.

They further said in April, net deposit growth in the banking sector was just Tk2,000 crore, a sharp decline from two years ago, when monthly growth regularly exceeded Tk20,000 crore. 

While there have been isolated months of upward movement, the overall trend has not changed, they noted.

Data shows that deposit growth stood at 9.25% at the end of June 2024 but has been on a declining path since then. The lowest point came in August 2024, when the growth rate dropped to 7.02%, the lowest in 18 months compared to previous years.

Since January, growth has been gradually improving. Boosted by record remittances, deposit growth peaked at 8.51% in March, the highest in nine months, but fell again in April.

For over a year now, deposit growth has hovered between 7% and 8%. Even at the beginning of 2024, it was above 10.5%.

A policymaker at a private bank noted that past loan scams and irregularities eroded public trust in the banking system. Customers of weaker banks, in particular, became alarmed when they faced difficulties in withdrawing their deposits.

Since taking over in August, Bangladesh Bank Governor Ahsan H Mansur has implemented a series of reforms aimed at stabilising the sector. While the measures have not significantly improved the condition of weak banks, they have prevented further deterioration.

Still, many of these banks are struggling to attract deposits, even with interest rates as high as 14%. In contrast, stronger banks are seeing deposit growth rates between 15% and 25%, despite the overall sector slowdown.

Currency outside banks falls by Tk19,000cr

Currency held outside banks declined in April, reversing a temporary spike during March ahead of Eid-ul-Fitr.

According to Bangladesh Bank data, cash outside the banking system fell from Tk2.96 lakh crore at the end of March to Tk2.77 lakh crore in April, a drop of Tk19,065 crore in just one month. 

However, the April figure is still 4.92% higher than the same month last year, an increase of about Tk13,000 crore year-on-year.

According to economists, an increase in the amount of money circulating outside the banking system is harmful to the economy. When money stays outside banks, the rate of transactions slows down, ultimately leading to reduced money creation in the economy.

When a significant portion of idle cash held by the public returns to the banking system, it not only strengthens banks' liquidity positions but also increases the volume of loanable funds, creating a more favourable environment for investment in the country.

As per central bank data, in October 2023, the amount of money circulating outside the banking system stood at Tk2.46 lakh crore. Due to persistent inflationary pressure, this figure continued to rise steadily month after month. By the end of July last year, it reached a peak of Tk2.92 lakh crore, the highest on record.