Banks are sitting on the biggest pile of surplus liquidity in at least two years thanks to the central bank putting out a fire hose of liquidity to prevent the economy from crashlanding amid the pandemic and low demand for funds from the private sector.
At the end of September, excess liquidity in the banking sector stood at Tk 169,658 crore, according to data from the Bangladesh Bank.
“The figure is the highest in recent times,” said a high official of the BB requesting anonymity as he is not authorised to speak with the media.
The surplus liquidity in the banking sector was close to Tk 2 lakh crore in three years ago, he added.
The expansionary monetary policy announced by the central bank and the lower trend of private sector credit growth pushed up excess liquidity in the market, said Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank.
Earlier in July, with the view to steering the economy away from a steep downturn, the BB rolled out a vastly expansionary monetary policy for fiscal 2020-21.
It slashed the repurchase agreement (repo) rate -- which is the rate that is used to signal the central bank’s monetary policy stance -- by 50 basis points to 4.75 per cent. Before the pandemic began in March, it was 6 per cent.
The BB also cut the reverse repo rate by 75 basis points to 4 per cent and the bank rate by 100 basis points to 4 per cent.
A reverse repo agreement is the purchase of securities with the agreement to sell them at a higher price at a specific date in future. In Bangladesh, banks deposit their money with the central bank at a rate set by the latter.
The bank rate, which is another major tool of the central bank, was cut after 17 years as part of the expansionary monetary policy. The BB, on the whole, uses the rate while giving out money to banks under its refinance scheme.
Earlier in March, the central bank had cut the cash reserve ratio and credit-deposit ratio to prevent the economy from crash landing for the countrywide shutdown enforced by the government to flatten the curve on coronavirus between March 26 and May 30.
Besides, the BB is also injecting funds to the financial sector by way of implementing the stimulus packages.
All in all, it appears the banking system is awash with liquidity now.
Now getting banks to use it on the parts of the economy that need it most have turned into quite the catch-22 situation.
The private sector credit growth has been hovering around the 9 per cent-mark for several months now, and the small matter of credit risk has come into the forefront.
Lenders are being very conservative in giving out loans given the depressed state of many businesses and owing to the 9 per cent ceiling on the interest rate for loans.
In September, private sector credit growth stood at 9.48 per cent, way lower than the BB’s target of 14.8 per cent for this fiscal year.
Rahman expects the private sector credit growth to pick up in the coming days as the stimulus packages disbursed by the banks is pulling the economy out of the ditch.
Only a return to a version of normality in the economy would haul up private sector credit growth and then the excess liquidity will then recede, said AB Mirza Azizul Islam, a former finance advisor to a caretaker government.
Another reason for the surge in surplus liquidity is that the government has cut back on its borrowing from banks in recent times, he said.
Between July and October, the government borrowed at Tk 945 crore from banks, down from Tk 35,958 crore a year earlier, according to data from the BB.
The lower trend of import payment and the surge in remittance inflows are also helping to boost surplus liquidity in the banking sector, said Emranul Haq, managing director of Dhaka Bank.
Between July and October, expatriate Bangladeshis sent home $8.9 billion, up 45.9 per cent year-on-year.
Import payments amounting to $11.7 billion were made between July and September, down about 12 per cent from a year earlier, according to data from the BB.
In the absence of demand for funds and the excess liquidity, banks have slashed the interest rate on their deposit products to improve their interest rate spread, a key determinant of a financial institution’s profitability or lack thereof.
Banks primarily turn in a profit by managing the spread between the interest rate on deposits that they pay to consumers and the rate they receive from their loans.
In other words, when the interest that a bank earns from loans is greater than the interest it pays on deposits, it generates income from the interest rate spread.
In simple terms, net interest rates spreads are like profit margins. The greater the spread, the more profitable the financial institution is likely to be.
So in the absence of demand for funds, banks have turned to slashing the rates on deposits to improve their spread.
In September, the banking sector’s weighted average deposit rate stood at 4.79 per cent, down from 4.95 per cent in the previous month, according to data from the BB.
Of the Tk 169,658 crore of surplus liquidity at the end of September, state-run banks were sitting on 36 per cent of the sum, private banks 52 per cent and foreign banks 11.9 per cent.
