It was not that long ago when people used to feel comfortable keeping their money in banks. However, many are now avoiding this.
According to the central bank, there has been an increase in the trend of keeping cash on hand. In the past six months, the amount of cash held outside the banking system has increased by Tk43,392 crore, meaning this amount was withdrawn from the banks and did not re-enter the banking system.
On the other hand, to control inflation, the interest rate on deposits has increased to 15%, the highest in recent years. Despite this attractive rate, the amount of money being deposited in banks has decreased.
Bangladesh Bank says total deposits in the banking sector increased by 8.77% over the past year, reaching Tk17,00,608 crore by May. This is the lowest growth rate in recent years.
Meanwhile, the amount of money in circulation is around Tk3,70,000 crore. Typically, most deposits are transferred to accounts.
The central bank's data indicates that people are keeping more cash on hand instead of in banks, exacerbating the liquidity crisis in banks.
This crisis has led commercial banks to increase inter-bank borrowing and seek loans from the central bank.
According to a Bangladesh Bank report, at the end of December, the amount of money held outside the banking system was Tk2,77,807 crore.
By the end of June, this amount had increased to Tk3,21,199 crore, a rise of Tk43,392 crore over six months.
A senior official at a private bank, on condition of anonymity, said the recent student protests might have further increased the tendency to hold cash. He believes that as a precaution, many people are now keeping more cash on hand.
Notably, following five days of closure due to the protests, banking transactions resumed for limited hours on July 24. On that day, more money was withdrawn than deposited.
Central bank data revealed that on the first day of reopening, banks borrowed a total of Tk29,172 crore, with Tk25,521 crore borrowed from Bangladesh Bank and Tk3,651 crore from other banks.
To cope with the liquidity crisis, banks continue to borrow daily.
On July 25, banks borrowed TK3,377 crore in call money. After a two-day weekend, banks borrowed Tk5,737 crore on July 28, Tk3,549 crore on July 29, Tk3,396 crore on July 30 and Tk3,816 crore on July 31.
Beyond this, banks also borrowed from the central bank, though the exact amount over the past five days is unknown.
Why are people keeping money out of banks?
Banking sector insiders cite several reasons for the increase in people’s cash holding. Key factors include rising commodity prices, inflation and the recent observance of Eid-ul-Fitr and Eid-ul-Azha.
Economists point to high inflation and a loss of trust in banks as major reasons. In March, the decision to merge several banks caused many depositors to withdraw their funds, increasing the amount of cash on hand.
Additionally, during the ongoing student protests, more people have been withdrawing money from banks, according to officials of several banks.
Central bank officials noted that circulation typically increased around Eid, with money usually returning to banks shortly after.
However, this time, less money had returned, they said.
Eid-ul-Azha was in mid-June, and just before that, on June 13, the amount of money in circulation had increased to Tk3,25,483 crore.
Normally, a significant amount of money returns to banks in the week following Eid. This year, however, only Tk4,284 crore returned to banks in the two weeks after.
Meanwhile, after Eid-ul-Fitr on April 11, the amount in circulation was Tk3,05,197 crore, which dropped to Tk2,91,142 crore by April 25 and further to Tk2,88,197 crore by May 2.
Dr Ahsan H Mansur, executive director of the Policy Research Institute and former chairman of Brac Bank, said high inflation was one reason, but increasing political instability and loss of trust in banks had made people more wary of banks.
"People might be holding more cash due to uncertainty." He noted that many people might be keeping cash on hand because they were uncertain about getting their money back from banks on time.
Former chairman of the Association of Bankers, Bangladesh (ABB), Mohammed Nurul Amin, said due to rising commodity prices, people's expenses had increased, forcing them to spend from their savings.
According to Bangladesh Bank, out of the notes in circulation, around Tk15,000-Tk18,000 crore is held in the vaults of 11,000 bank branches nationwide to meet daily demand. The remaining Tk3,06,000 crore is kept at home, in safes or business establishments.
