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Dhaka Tribune

People keeping cash outside banks despite promise of high returns

  • Experts say fear, inflation, mergers drive money out of banks
  • Interest rates soar, banks promise double returns
Update : 30 May 2024, 01:46 PM

Two years ago, the interest earned by depositing money in banks was significantly lower than it is now, with banks currently offering three times more interest. Despite this, people are choosing to keep their money with themselves rather than depositing it in banks.

According to data from the central bank, by the end of March, the amount of cash in people's hands outside the banking system stood at Tk261,195 crore, up from Tk257,574 crore the previous month. 

This increase occurred despite banks offering nearly 10% interest on deposits at the time.

Typically, people withdraw money from banks for their needs and then deposit it back into some bank account. Sometimes, money changes several hands before being deposited back into a bank. However, it appears that in March, after being withdrawn from banks, at least Tk3,000 crore did not return to the banking system. 

Experts believe that due to high inflation, many are breaking into their savings. Additionally, many people are withdrawing their money out of fear that banks are currently facing a crisis.

The managing director of a private bank, speaking on condition of anonymity, said typically money circulated through various hands before returning to banks. 

Recently, due to news of mergers, many people had withdrawn money from certain banks out of fear, the veteran banker said, adding that many were turning to their savings due to high inflation.

What are banks doing?

Bank officials said that after Bangladesh Bank decided to merge weak banks with strong ones in March, many people withdrew their deposits from the likes of BASIC Bank and others. Additionally, Ramadan was in March this year, during which demand for cash typically increases. As a result, the amount of money outside the banking system increased, they added.

Consequently, banks are facing a slight liquidity crisis. Meanwhile, to meet their import liabilities, banks are purchasing dollars from the central bank, causing a portion of the money to be tied up. However, the central bank has been supporting commercial banks by providing liquidity assistance under favourable terms, maintaining stability in the market.

Many banks have now initiated aggressive competition to attract deposits. Most are now collecting deposits at an interest rate of 10% to 11%. Dozens of banks are offering to double the amount deposited within five years. For instance, AB Bank is offering to double the amount within 5.5 years. United Commercial Bank is collecting deposits promising to double the amount within six years. Bengal Commercial Bank is collecting deposits saying it will double the amount within 5 years and 3 months. Interest rates on deposits have risen to 10.4% at several banks, including Jamuna Bank. As a result, the interest rate on loans has crossed 15%.

However, two years ago, in 2022, the interest rate on deposits had fallen below 4%. At the end of June that year, the average interest rate on deposits stood at 3.97%. At the time, the average interest rate on loans had gone down to 7.09%, from 7.11% in March of that year.

According to the central bank's records, over the past two years, interest rates on deposits as well as loans have more than doubled. This sudden rise has adversely affected customers who took out loans for home or car purchases as well as large and medium industrial entrepreneurs.

According to central bank data, comparing this January to last December, there was a decrease of Tk13,000 crore in deposits within a month. 

In December, the total deposit balance in banks was Tk1,770,000 crore, which went down to Tk1,757,000 crore in January. The calculation includes the interest and profits accrued to depositors. However, when excluding the incurred interest and profit, the deposits decreased by Tk9,000 crore within a month.

Central bank data show that many savings accounts reached maturity in December, and the money in a significant portion of these accounts was withdrawn by customers.

That the banking sector was facing an issue as a greater amount of money remained outside the banks in March was not the case, said Dr Zaid Bakht, a researcher at the Bangladesh Institute of Development Studies(BIDS) and a prominent banker.

"Although there is more money outside the banking system, the deposit growth rate has increased. Therefore, it should not be assumed that people are withdrawing money from banks and that money is not returning to the banks.”

“However, after people’s loss of confidence in some Islamic banks and the announcement of bank mergers, depositors withdrew large amounts of money from some banks, but that money has been deposited in other banks,” he added.

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