Taka flowing back to banks, but slowly

After a 10-month surge in mattress money, excess cash outside the banking system has started to decline over the past two months, albeit slowly.

Bankers attributed this shift to the gradual restoration of customer confidence in banks and a reduction in financial irregularities under the interim government.

Central bank data shows that cash outside banks decreased by Tk5,743 crore in October, bringing the total to Tk2.78 lakh crore. Although this figure remains 13% higher than the same period last year, it indicates a positive shift. 

At the end of September this year, the cash outside banks stood even higher at Tk2.84 lakh crore, down from over Tk2.90 crore in August, a month marked by severe political unrest.

Economists view excess liquidity as detrimental to the economy, as it hampers monetary exchange and reduces money creation. A significant return of funds to banks can improve liquidity, increase loanable funds, and stimulate investment.

Sheikh Mohammad Maroof, managing director of Dhaka Bank, told TBS that political instability, inflation, and irregularities in the banking sector had eroded customer confidence, leading many to hold onto cash. However, the inflow of funds into banks in September and October signals a gradual restoration of trust.

He added that banks are actively working to rebuild confidence by encouraging customers to open new accounts and enhancing customer service.

Addressing the issue of cash held outside the banking system, the banker said that a significant portion might belong to holders of black money. "I believe corruption has reduced since the interim government assumed office, which has lessened the influence of black money on the economy and contributed to the return of funds to banks," he added.

Central bank data shows that the amount of money outside banks stood at Tk2.46 lakh crore in October 2023. Since then, inflationary pressures have driven a steady monthly increase, peaking at Tk2.92 lakh crore in July 2024.

Due to internet disruptions and limited banking operations in July and August, amid a student-led uprising that led to the fall of the Awami League government, the rise in cash outside banks was minimal. However, from September onwards, funds began flowing back into the banking system.

In October, bank deposits grew by 7.28% year-on-year, reaching Tk17.55 lakh crore. The deposit increase amounted to Tk14,208 crore compared to the previous month. The deposit growth rate in September was 7.26%, according to central bank data.

Year-on-year, the deposit growth for August stood at 7.02%, the lowest in 18 months, with the previous low of 6.86% recorded in February 2023.

Senior officials from several state-owned and private banks told TBS that, despite the ongoing situation, deposits in reputed banks have risen significantly as customers lack the confidence to keep their money in weaker banks.

The managing director of a prominent bank, on condition of anonymity, said, "Customers are now more discerning. Previously, they were drawn to banks by high interest rates. However, now they prioritise a bank's overall financial health over rates. This shift benefits both customers and banks."

As a result, some banks that previously operated without regard to policies have begun to adjust their practices. Additionally, customer confidence is gradually returning, especially as the central bank takes a firmer stance against irregularities, the official added.