Commercial banks appear to be recovering gradually from a persistent liquidity crisis, helped by cash injections from the central bank despite ongoing tight monetary policy, according to officials and bankers.
This much-anticipated improvement is reflected in two key indicators of liquidity: the volume of excess liquidity in banks and uninvested cash in the vaults in recent months.
Excess liquidity includes cash and cash-equivalent assets like treasury bills and bonds, along with cash reserves other than liquid assets. Uninvested cash means credits that are available in the vaults.
According to Bangladesh Bank (BB) data, uninvested excess cash in the banking system stood at Tk 116.30 billion in June 2023. This figure fell to Tk 54.30 billion in November 2023 and Tk 51.56 billion in January 2024.
However, there has been a rebound since then, with the figure rising to Tk 76.43 billion and Tk 84.09 billion in February and April 2024 respectively, according to the central bank data.
Similarly, excess liquidity in commercial banks has also shown signs of recovery.
The Bangladesh Bank data shows it was Tk 1.66 trillion in June 2023. The volume then fell to Tk 1.41 trillion in November 2023 and Tk 1.55 trillion in January 2024. However, it rose to Tk 1.62 trillion in February and Tk 1.76 trillion in April 2024.
While talking to The Financial Express on condition of anonymity, a Bangladesh Bank official said the liquidity situation has improved after months of tightness due to various central bank policy measures.
"Commercial banks have been fully meeting the government's domestic borrowing requirements since the central bank decided to skip devolvement to control inflation from the beginning of this financial year (FY24). This put immense pressure on bank liquidity," he said.
The central bank has been consistently accepting all funding requests from commercial banks to provide them with breathing space, the official added.
"As a matter of fact, liquidity injections into banks have increased significantly in recent months, which has largely improved the banking sector's liquidity position."
According to central bank data, liquidity support to banks rose from Tk 633.47 billion in June 2023 to Tk 3.45 trillion in November, Tk 3.51 trillion in December and Tk 3.63 trillion in January 2024.
Although the figure dropped slightly to Tk 3.0 trillion in February, it remained high at Tk 3.11 trillion in March 2024.
Emranul Huq, Managing Director and CEO of Dhaka Bank, said credit demand remains low due to a recent decline in port-import finance and offshore banking finance.
"These factors could be behind the improvement in the two liquidity indicators," Mr Huq told the FE.
Mirza Elias Uddin Ahmed, a top executive at Jamuna Bank, admitted the fact that the banking sector has sufficient surplus liquidity overall. Still, some banks with high non-performing loans (NPLs) face liquidity crunch because they cannot access credit from interbank sources.
"These banks desperately need central bank funding. Otherwise, the overall liquidity situation in the industry is currently good," he added.
A senior executive from a private commercial bank, who wished to remain anonymous, said banks have increased their investments in government securities due to the attractive returns offered by treasury bills and bonds.
The currency swap arrangement launched in late February has also provided banks with significant amounts of cash, further improving the liquidity situation in the banking system, he added.
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