Commercial banks' holdings in government securities (G-sec) continue ballooning for plum bets put on treasuries to meet budget shortfalls after a freeze on printing money as an inflation-control measure.
Such diversion of funds into G-sec is creating a crowding-out effect in credit supply to private sector, business chambers say, but bankers say they are investing in high-end treasuries amid a bit dampening credit demand from businesses in a prolonged business sluggishness.
The central bank ceased 'devolvement' mechanism of printed money supply to the exchequer as an option for taming inflation-fuelled price rises that hit the down-and-outs hard, but this belt-tightening basically intensifies liquidity stress in the country's banking industry, officials and bankers have said.
As the government stopped taking supplying high-powered money to hold treasury bills and bonds, the banks' share in the market of government securities increased to 68 per cent in the financial year (FY) 2023-24 from 61 per cent recorded in the previous fiscal (FY'23), sources at the Bangladesh Bank (BB) said.
With rising participation of banks the market size of government securities expanded by over Tk 598 billion to Tk 5.50 trillion in the just- past fiscal (FY'24) from Tk 4.89 trillion in FY'23.
Of the total G-sec amount in the last fiscal, treasury bonds hold Tk 4.08 trillion while participants bought treasury bills amounting to Tk 1.42 trillion, according to the BB statistics.
Banks altogether invested Tk 3.72 trillion (Tk 2.51 trillion in T-bonds and Tk 1.21 trillion in T-bills) in FY'24 which was 68 per cent of the entire G-sec market.
In the previous fiscal, banks invested Tk 3.05 trillion---Tk 2.30 trillion in T-bonds and Tk 1.31 trillion in T-bills-accounting for 61 per cent of that fiscal's G-sec market.
Officials and money-market analysts say the government borrowing from the financial sector through issuing securities keeps rising because of growing budget-financing shortfalls due to less-than-expected level of revenue incomes.
Seeking anonymity, a BB official says domestic government borrowing is on the upturn significantly because of widening budget deficit for not receiving expected revenues.
On the other hand, the central banker says, the BB stopped holding securities through supplying high-powered money in a bid to contain inflation since July 2023 and this stance also significantly contributes to the rise in government securities in banks' holdings.
"I think it (the volume of government securities) will continue growing unless the revenue-mobilisation target is reached," the official adds.
According to the BB data, the central bank's share of government securities was 27 per cent, equivalent to Tk 1.31 trillion, in FY'23 and it hit a rock-bottom 15 per cent or Tk 849 billion in the following fiscal.
But the government's growing dependence on bank borrowing to meet its budget deficit further tightens the existing liquidity pressure in commercial banks. As a matter of fact, the scope of getting formal credits from the banking sector for the private sector is squeezing.
Bangladesh Chamber of Industries (BCI) led by its president Anwarul Alam Chowdhury Parvez recently met the BB governor when they raised concerns over growing inflow of former credits into government securities.
Talking to the FE, Mr Anwarul Alam Chowdhury Parvez said the cost of formal credits continued to rise while the industries face difficulties in opening LC (letter of credit) in banks amid the ongoing forex dearth.
Simultaneously, he said, the commercial lenders have largely been making their investment in government securities riding on higher yields instead of their regular lending activities.
"And it may squeeze the scope of getting credits by the private sector. Look at the data of private-sector credit growth, which is on the downturn," the chamber chief said.
Private-sector credit growth declined by 0.59 basis points to 9.90 per cent in April this year compared to the previous month, marking it the lowest level in five months.
The private-sector credit growth dropped to 9.90 per cent in April last from the March count of 10.49 per cent. The growth was over 11.28 per cent in April 2023, the central bank data showed.
Managing director and chief executive officer of Dhaka Bank Emranul Huq says increased government bank borrowing further tightened the existing liquidity stress in banks. As the credit demand from the banking sector is on the downturn, the liquidity stress is not visibly seen yet.
"Alongside depletion of private sector's credit appetite," he says, "the infrastructure financing, post-import financing and offshore financing have gone down significantly in recent times, allowing the banks to invest in the risk-free government instruments."
According to the bankers, the average deposit growth in banks was 13 per cent while the average credit growth only 6.0 per cent.
Not only the banks, the large and medium corporate depositors have now been diverting their funds into government securities to get handsome returns of over 11 per cent in short terms whereas most banks are offering less than 10 per cent, according to him.
"The government needs to be very watchful in increasing market of government securities because prolonged slowness in credit demand could hamper overall economic growth," he added.
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