Banks’ investment in Govt. securities

Despite the sluggish performance of the industrial sector, the overall profitability of Bangladesh's banking industry has surged in 2025. Most banks have shifted their focus from industrial lending to investments in government securities such as treasury bills and bonds. This strategic realignment has resulted in remarkable profit growth for leading institutions like BRAC Bank, The City Bank, Eastern Bank (EBL), Dutch-Bangla Bank, and Prime Bank.

Interestingly, this rise in profitability has occurred even though the net interest income (NII) of most banks has declined compared to previous years. The preference for government securities is largely driven by their perceived safety, as repayment behavior among borrowers has become increasingly concerning in recent years. With non-performing loans (NPLs) continuing to rise, banks are finding investments in government instruments to be a more secure and stable source of earnings than traditional lending.

It is worth noting that treasury bill and bond rates have recently been reduced, with yields now in the single digits. Although the profit margin from these instruments is not significantly high, banks are increasingly investing in them to maintain portfolio stability. However, this trend may create substantial vulnerability in industrial growth due to reduced borrowing in the private sector. Any revision of the repo rate may further influence inflation. Since most bank deposits are short-term in nature, there also exists the possibility of a decline in public deposits.

Banks generally earn profitability through the spread between the cost of deposits and the returns from interest income and investments. If deposit growth slows, banks may have to borrow through the SDF or call money markets at higher rates, which would further narrow their profit margins.

Additionally, maintaining the required Advance-Deposit (AD) ratio could become increasingly challenging. Investment in government securities, though seemingly safe, is actually an unsustainable and temporary way to mitigate risk. Until the upcoming national election, this situation is likely to remain unchanged. Overall economic growth through the private sector may not progress along a satisfactory path, and persistent inflation will continue to affect deposit mobilisation in the banking system. Therefore, it is essential to channel more investments into domestic manufacturing industries with strong and consistent demand.

Kawsik Azad Pronoy

A banker and business analyst