More Idle Cash Means Less Investment

Idle cash in the banks’ fund is not new; rather, it is a very common phenomenon. However, the amount of idle cash may be a concerning issue. Banks deal in money, as they collect money by mobilising deposits from the economy’s surplus units and, at the same time, lend money through disbursement of loans to the economy’s deficit unit. While performing these dual functions, banks must maintain optimum liquidity, which is the most challenging and difficult task. Banks are committed to returning the deposits on demand, while there is no certainty of recovering loans on time from the borrowers. Under this challenging situation, only effective liquidity management may keep the banks in a comfortable situation in meeting depositors’ demand for withdrawing money from the bank. So, maintaining optimum liquidity is the key to banks’ business, because inadequate liquidity may cause the collapse of the bank, while surplus liquidity may cause additional cost to the banks.

The concept of idle cash comes from liquidity management, because if excess liquidity is maintained, there may be available idle cash. Although there is close functionality between liquidity and idle cash, there is a fundamental difference between these two concepts. Firstly, liquidity is the part of total deposits which the bank retains in the form of cash and makes it readily available to meet the withdrawal request received from the depositors. On the other hand, idle cash is the part of the investable fund which was supposed to be invested but cannot be invested due to lack of demand from the business community. Secondly, liquidity does not cause cost burden, as its cost of funding is already loaded with the loan pricing. Conversely, idle cash always causes cost burden, which actually refers to the foregone income. Thirdly, liquidity and idle cash are found to be inversely correlated, as poor liquidity management results in more idle cash or vice versa. 

There are many reasons behind the rising idle cash in the banks’ treasury. If asset liability management (ALM) does not function properly, then idle cash may rise. Banks’ tightening their lending policy without proportionate adjustment of deposit mobilisation drive may result in idle cash in the treasury. Weak investment demand from the business community also contributes to the rise of idle cash. Good recovery of loans without the scope of reinvestment may cause rising banks’ idle cash. Rising deposit mobilisation while declining credit growth results in significantly rising banks’ idle cash, which is what has happened in the recent situation in Bangladesh.

In a report, rising of deposits by 10.74% has been analysed as the cause of idle cash in the banking sector, which may not be fully true. Because rising of deposit by about 10% does not suggest an effective growth of deposit. Because, during the last year, the average deposit rate was about 7% to 9%, and in practice, accrued interest on the deposit is hardly paid in cash, rather accumulated in the deposit, which causes the rise of the deposit without additional mobilisation. If a bank maintains an average of one thousand core taka deposits, what will automatically rise to one hundred eighty crores in the following year? So, a rising deposit by 10.74% does not suggest the addition of enough new deposits, and therefore, merely a rising of deposit may not play any role in rising idle cash in banks’ treasury. However, declining private sector credit growth to only 4.47% may be the contributory factor against building enormous idle cash in banks’ treasure.  

It is very obvious that the country’s business and investment have suffered massive setbacks in the last few years. Businessmen are the worst sufferers. There is no new investment, and even existing investment cannot be continued due to many factors beyond their control. Issues like high interest rates, lack of alternative sources of funds, law and order situations, extortion, political uncertainty, attacks on businessmen, and closure of factories have left the country’s business community in a bewildered and helpless situation.  An acute energy crisis has aggravated the situation. With all these multiple implications, the country’s business community has been striving hard to survive, which is not conducive to investment.

More importantly, there is no sign of immediate improvement of the situation. Although the new govt. passed only six months ago, they seem to be too busy with multiple issues where the economy is getting less priority. Consequently, the businessmen’s hope is getting shattered. 

So, the government should take some effective measures with a view to reviving the country’s economy, and in this connection, the country's businessmen can be supported and encouraged to invest without any fear. The government certainly has a series of priorities, but business, investment and the economy should top the list.