Banks are experiencing a renewed liquidity crunch as uninvested cash levels in the banking sector continue to decline under the central bank's highly contractionary monetary regime.
This gradual decrease in a key liquidity indicator has raised concerns among bankers, as they attribute it to the Bangladesh Bank's (BB) efforts to curb inflation by restricting the money supply.
According to BB data, uninvested excess cash in the banking system stood at Tk 269 billion at the end of June 2022.
This figure plummeted to Tk 116.30 billion by June 2023. The decline accelerated further, reaching Tk 54.30 billion in November 2023. January data shows a further drop to Tk 51.56 billion.
Meanwhile, overall excess liquidity, which includes various cash and cash-equivalent assets like treasury bills and bonds, also showed a downward trend.
From Tk 2.03 trillion in June 2022, it nearly halved to Tk 1.66 trillion by June 2023 and Tk 1.41 trillion by November 2023. However, there was a slight increase to Tk 1.53 trillion by the end of January this year, according to BB data.
Speaking on condition of anonymity, a central bank official said deposits in the banking system have continued to grow, while credit growth to the private sector remains sluggish.
Despite these developments, the official said banks are now facing liquidity pressure due to a rise in non-performing loans (NPLs) and the BB's decision to forgo loan rescheduling options.
Besides, banks are fulfilling the government's domestic borrowing requirements, while also continuing to purchase US dollars from the BB's foreign exchange reserves. This dollar-buying activity is also contributing to the liquidity strain.
The central bank official said the BB raised the policy rate to 8 per cent as part of its inflation-fighting measures. "And now it is being reflected in the liquidity situation of banks."
The declining level of excess cash in banks has raised concerns among industry leaders, according to Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank (MTB) PLC.
He told The Financial Express that the significant drop is "not a good sign at all for the economy."
Normally, banks maintain excess cash reserves between Tk 300 billion and Tk 350 billion. However, the recent decline has been alarming, according to Mr Rahman.
He fears that banks could struggle to operate if the central bank reduces or eliminates liquidity support under such tight conditions.
Emranul Huq, managing director and CEO of Dhaka Bank PLC, said banks need to maintain sufficient cash to meet current and future client credit demands.
"Failure to meet even one client's cash needs would severely damage public trust in banks," he warned.
Calling for a serious investigation into the reasons behind the declining excess cash, the seasoned banker questioned whether it stemmed from genuine liquidity tightness or if banks were simply choosing to invest more in higher-yielding government securities.
He noted the recent slowdown in overall economic activity due to various internal and external factors. "Where is the liquidity going in such circumstances?" he pondered. "The government urgently needs to identify the exact reasons behind the liquidity shortage and take appropriate action."
Founding Chairman of the Policy Exchange of Bangladesh Dr Masrur Reaz offered a combination of probable causes for the decline.
Firstly, he pointed to media reports on loan irregularities, which might have triggered panic withdrawals from bank counters.
Besides, the rising cost of living could be prompting depositors to withdraw cash to cover increased expenses.
Another probable cause, according to the economist, could be the recent slowed deposit growth, indicating a decrease in the expected cash inflow.
"These three factors could be contributing to the drop in excess bank cash," Mr Reaz concluded.
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