Thursday, 28 October, 2021

Banks struggling with excess liquidity

♦ Banks’ liquidity reaches Tk 4.44 trillion in July ♦ Private sector credit growth yet to pick up

  • Anisul Islam Noor
  • 8 October, 2021 12:00 AM
  • Print news

The banking sector is under pressure to maintain a minimum interest rate set by Bangladesh Bank (BB) on term deposits and manage surplus liquidity as credit growth is yet to reach the expected level.

Bangladesh Bank’s recent financial report shows that the total liquid assets of the scheduled banks stood at Tk 4.44 trillion in July 2021 from Tk 4.49 trillion in June 2021. The minimum required liquid asset of the scheduled banks in July 2021 was Tk 2.20 trillion.

The central bank has started to lift the excess liquidity from August this year.

Sector insiders have said the banks are bearing the brunt of excess liquidity since the central bank is following an expansionary monetary policy to support the supply of low-cost funds to increase credit disbursement.

“This is a problem that banks have to provide interest on term deposit at a time when the investment demand has dropped despite low interest rates. It is difficult for banks to maintain the interest rate in line with the inflation margin,” said a managing director of a fourth-generation private bank, wishing not to be named.

He said fixing the minimum interest rate on deposits does not help the banking sector, it should be determined by the market situation.

He said the BB’s expansionary monetary policy pushed the inter-bank call money rate to 1.85 percent in September from 1.79 percent in August this year.

According to the BB monthly statement of September 2021, net foreign assets and net domestic assets of the banking system increased by 20.17 percent and 9.07 percent respectively at the end of August 2021 compared to their levels in August 2020.

On the other hand, private sector credit growth stood at 8.42 percent year on year (y-o-y) in August 2021 which was lower than the 9.36 percent (y-o-y) in the same month of 2020.

In the monetary policy statement, the central bank emphasized pushing private credit growth to 11 percent by the end of December and 14.80 percent by the end of June FY22.

Though the private credit growth has increased in August this year, the growth missed the target.

Former Bangladesh Bank governor Dr. Saleh Uddin Ahmed said BB should encourage banks to invest in the productive sectors by withdrawing more liquidity from the market.

“Usually the central bank withdraws such excess liquidity through bills/bonds to create demand in the money market, and the depositors will get more interest/profit if banks invested money in the productive sectors,” he said.

He also suggested bringing pace in credit disbursement as per the target set by a monetary policy which will help create demand for money and yields (interest) also. BB Executive Director and spokesperson Md. Serajul Islam on Thursday told the Daily Sun that excess liquidity in the banking industry increased due to lower private-sector credit demand owing to the COVID-19 pandemic and injection of funds under the stimulus packages.

The central bank meanwhile started withdrawing excess liquidity through 14-Day, 30-Day, 91-Day, 182-Day, and 364-day treasury bills and bonds to increase the demand in the money market, he said.

The central bank has lifted around Tk 800 billion so far from the money market through bills and bonds.