Country's commercial banks have started investing their excess funds in the government securities following lower demand for fresh credit especially from private sector, bankers said.
As a result, the banks' investment in the treasury bonds and treasury bills rose to Tk 929.09 billion, which was 94.34 per cent of the total excess liquidity, as of February 20 last from Tk 790.09 billion on January 9 this year, according to the central bank statistics.
"A lower-than-expected level of credit demand from the private sector has necessitated most banks to put their excess liquidity in government securities," a senior treasury official of a leading private commercial bank told the FE Wednesday.
The overall excess liquidity with the commercial banks stood at Tk 984.78 billion as of February 20 last. It was Tk 893.37 billion as of January 9.
"It's not a core business of banks. But they are now required to do so for minimizing their cost of funds," Mohammad Nurul Amin, former chairman of the Association of Bankers, Bangladesh (ABB), told the FE.
The senior banker also said such trend might continue in the coming months if the demand for fresh credit improves.
"We've no alternative right now to investment in the government securities for minimising our cost of funds," the treasury official explained.
He also said the yield on government securities, particularly short-term ones, declined continuously due mainly to higher demand for the risk-free securities.
The yield on 91-day treasury bills (T-bill) came down to 7.29 per cent on Sunday last from maximum 11.50 per cent in 2012, according to a treasury official.
"The banks always prefer to invest their funds in the short-term securities instead of long-term ones for avoiding mismatch of their overall fund management in future," the private banker observed.
Currently, three T-bills are being transacted through auctions to adjust the government's borrowing from the banking system. The T-bills have 91-day, 182-day and 364-day maturity periods.
On the other hand, five government bonds with duration of two, five, ten, fifteen and twenty years respectively - are being traded in the market.
Talking to the FE, a senior official of the Bangladesh Bank (BB) said the banks normally purchase the government securities for maintaining statutory liquidity ratio (SLR) with the central bank.
But most of the banks now prefer to invest their excess funds in the securities for avoiding further capital requirement in line with the Basel-II framework, he added.
The central bank has fixed the capital adequacy ratio (CAR) at minimum 10 per cent as part of the preparation for implementing the Basel-III in the banking sector in 2014, according to the central banker.
Under the Basel-II, the standard requirement of the CAR is minimum 8.0 per cent.
Bangladesh is now implementing the Basel-II accord to consolidate the capital base of banks in line with the international standard.
"The banks are now cautious about selecting their prospective borrowers for avoiding fraud and forgery in the banking sector," the BB official said while explaining lower credit growth in recent months.
All banks' credit growth came down to 7.44 per cent as of February 20 last from 7.99 per cent on January 30 this calendar year while deposit growth rose to 16.48 per cent from 16.14 per cent, the BB data showed.
More than 10 banks are still facing negative credit growth that indicates the banks are unable to lend their excess funds.
"Traditional banking business has faced a stagnant situation for more than a year due mainly to poor demand for fresh credit caused by the political uncertainty, inadequate infrastructure facilities and availability of low cost foreign currency loan for the private sector," another private banker stated.
He also said the credit-deposit ratio (CDR), an important indicator of the banking business, remains almost static at around 71 per cent, which is lower than safe limit, set by the BB.
The central bank earlier set CDR at 85 per cent for the conventional banks, while it remains at 90 per cent for the Sharia-based Islamic banks.
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