Banks see highest deposit growth in nine months as trust turns a corner

Infographics: TBS

The country's banking sector experienced its highest deposit growth in nine months in March, buoyed by a resurgence of customer trust and a record inflow of remittances, according to data from the central bank.

At the end of March, the total amount of deposits in the banking sector stood at Tk18.18 lakh crore, which is 8.51% higher than in the same month of the previous year. At the end of March 2024, deposits in the banking sector amounted to Tk16.75 lakh crore.

The deposit growth in the banking sector was 9.25% at the end of June 2024. However, after that, the deposit growth started to decline. Last August, the deposit growth was the lowest in the previous 18 months, with a growth rate of 7.02%. From January of this year, the growth rate has shown a slight upward trend. Following this, March saw the highest deposit growth in nine months.

Senior officials from several banks have attributed the earlier loss of customer confidence to instances of fraudulent loan acquisitions within the banking sector. Concerns were further aggravated by depositors in weaker banks facing difficulties in withdrawing their funds.

Since assuming office last August, the central bank's governor, Ahsan H Mansur, has implemented a series of measures aimed at restoring stability. These include the reconstitution of the boards of at least 13 banks, providing liquidity support through printing money and curbing the issuance of anonymous loans.

While the overall condition of these weaker banks has not drastically improved, these steps have prevented further deterioration. The governor has also informed the media of the improved performance of Islami Bank Bangladesh and UCB Bank. Simultaneously, the increased confidence of customers in stronger banks has led to a rise in deposits in these institutions. Furthermore, many banks are now offering interest rates of up to 14% on deposits to attract customers.

Change of growth trend 

Bankers have commented that while deposit growth increased in March, it is not yet possible to say whether the growth trend has changed.

Welcoming the increase in deposit growth, Selim RF Hussain, managing director and CEO of BRAC Bank, said the long-term impact cannot be understood by looking at growth data from just one or two months. "We would need to wait several more months to ascertain whether deposits have entered a sustained growth trend."

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, echoed the sentiment that more time is needed to understand the deposit growth trend. 

He explained that deposit growth can increase in a single month for various reasons. "Many banks are offering higher interest rates, which could be one factor. Additionally, the increased remittances in March may have also played a role in the deposit growth."

Mohammad Ali, managing director and CEO of Pubali Bank, identified four key reasons behind the deposit growth in March. Firstly, he stated that the central bank's increase in the policy rate has prompted banks to offer higher interest rates on deposits, making them more attractive to customers.

Secondly, banks with a high Advance to Deposit Ratio (ADR) initiated drives to collect more deposits, which proved successful in attracting some funds.

Thirdly, the central bank's measures to improve governance in the banking sector, including the reconstitution of the boards of several private banks, have gradually restored customer confidence.

Fourthly, a record $3.29 billion in remittances was received in March. When remittances enter the banking sector, the funds are credited to the recipients' bank accounts. Customers typically do not withdraw the entire amount immediately, leading to an increase in deposits. This was a significant factor in the recent deposit growth.

Currency outside banks rises Tk25,000 crore

Despite a recent trend of decline, the amount of currency held outside banks increased again in March.

Central bank data indicates that the amount of money held by the public stood at Tk2.96 lakh crore at the end of March, a sharp increase of Tk25,000 crore from the Tk2.71 crore recorded at the end of February. This represents a 13.49% increase compared to March of the previous year, with an overall rise of approximately Tk35,000 crore in the amount of money outside banks over the past year.

Economists caution that an increase in the amount of money held outside banks can be detrimental to the economy as it reduces the velocity of money, ultimately lowering money creation. A significant return of this cash to the banking system would improve banks' liquidity positions and increase loanable funds, potentially fostering investment in the country.

Mohammad Ali attributed the rise in currency outside banks in March primarily to the Eid festival. During the period, people tend to hold more cash for shopping purposes.

A deputy managing director of a leading private bank noted that while inflation is currently on a downward trend, the inflation rate remains high. Consequently, people's expenses have increased compared to previous periods. In addition to Eid-related spending, the increased cost of goods is also compelling individuals to keep more cash on hand to cover expenses.

The central bank data shows that the amount of money held outside banks was Tk2.46 lakh crore in October 2023. Since then, inflationary pressures have caused a consistent monthly increase, peaking at Tk2.92 lakh crore at the end of July last year.