Banks lament deposit depletion as investors bet on lucrative treasuries

Government securities (G-sec) become hotcakes to institutional and individual depositors as their investments in treasury bills and bonds increased manifold in recent times, in an unhappy coincidence with bank deposit squeeze.
Bankers and officials say allured by a record rise in the rates of returns on the government fundraising instruments, both categories of depositors in the banking sector have started diverting their funds into the risk-free investment tools, notwithstanding a sort of cumbersome procedure.
This switch from banks to sovereign bills and bonds exerts more pressures on the banks' depleting liquidity stock.
According to them, the depositors in the banking system found the government securities more profitable than the bank rates at a time when other investment options are getting squeezed.
As a result, the depositors--large ones in particular--started making a beeline towards the treasury bills and bonds--two major investment instruments issued by government to borrow money from the banking system as part of its domestic borrowing to make up for recurrent budget shortfalls.
Sources at the central bank of Bangladesh have said institutional and individual depositors mostly take part in the non-competitive bids so that their offers get accepted without any competition at the weighted average rate.
The institutional depositors are financial institutions, insurance companies, corporate bodies, provident/pension fund. The size of G-sec ballooned to around Tk 5.50 trillion at the end of financial year of 2023-2024 from previous fiscal's Tk 4.90 trillion.
According to the statistics of Bangladesh Bank (BB), the financial institutions altogether invested Tk 9.48 billion in the G-sec in FY'23 but their investment recorded a steep 210-percent increase to Tk 29.35 billion in FY'24.
The investment by insurance companies in the government securities grew by 19 per cent to stand Tk 397 billion in FY'24 from Tk 332 billion recorded a year ago.
Financial contribution of the corporate bodies to risk-free instruments saw a 217-percent growth with their cumulative investments having ballooned to Tk 232 billion in FY'24 from Tk 73.24 billion registered in FY'23.
Provident and pension funds' investment increased 63 per cent to reach Tk 229 billion in FY'24 from Tk 141 billion in the previous fiscal.
Contributions of mutual fund also grew 93 per cent to Tk 12.26 billion by the end of FY'24 from Tk 6.34 billion in FY'23, the data showed.
According to official statistics, the highest growth of 328 per cent was observed in the category of individual investors who invested Tk 47.21 billion in FY'24 from FY'23 count of Tk 11.0 billion.
Seeking anonymity, a BB official says there are two areas in the bidding on government securities - competitive and non-competitive ones. Primary-dealer banks and other banks bid for competitive area while institutional and individual investors normally put their stakes on non-competitive ones.
In the competitive area, the central banker says, the participants need to compete with one another over rates. And the government decides regarding the cut-off yield considering its overall liabilities and requirements.
"So, there is a risk of not getting their bids accepted. That's why institutional and individual investors chose non-competitive option," the central banker explains the tricks of the trade.
Citing the auction guidelines, the official says there is a maximum ceiling of 30 per cent of the notified amount at each auction for the non-competitive bidders. "Now, it's crossed 20 per cent and we're receiving huge response from the institutional and individual investors."
The share of the non-competitive bids against the notified auction demand was less than 10 per cent in June 2023 from when the rates kept climbing fast. Now the share leapt over 20 per cent.
Another central banker, who also preferred not to be quoted by name, has said they have been witnessing more participation of such investors particularly in the treasury bills where the rates are much higher than that offered by the commercial banks.
The rates in 91-day, 182-day and 364-day treasury bills increased to 11.65 per cent, 11.80 per cent and 11.95 per cent respectively as on July 24 last, while deposit rates in most of the banks are hovering in-between 7.0 per cent and 10.50 per cent.
"That's why they (institutional and individual depositors) are more interested in treasury bills." The official also says anyone can take part in the auction of the government securities through using the cliental-service window in banks but they need to open BPID (business partner identification) number, and it will be processed by the central bank like the BO (beneficiary owner) account on the capital market.
According to the BB data, the cut-off yields on two-year, five-year, ten-year, 15-year and 20-year securities were 10.20 per cent, 10.35 per cent, 10.74 per cent, 11.18 per cent and 11.23 per cent respectively.
The cut-off yields on two-year, five-year, ten-year, 15-year and 20-year securities were 12.25 per cent, 12.40 per cent, 12.55 per cent, 12.65 per cent and 12.78 per cent respectively.
Managing Director and CEO of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman also says because of higher returns, institutional and individual investors have already started diverting their funds into the government treasury instruments.
"It puts additional pressure on the banks under the current context and there is a perception among many that the rates in the government securities would go up further. So, the flow of corporate and individual depositors would go further in the coming days," he says.
Although the investment by the commercial banks into the government securities increased slightly, their share, in fact, declined. According to the BB statistics, the banks invested Tk 3.02 trillion in FY'23, which was 62 per cent of the overall investment in the G-sec.
In the FY'24, the banks invested Tk 3.27 trillion, which accounts for around 60 per cent of entire investment portfolio in the G-sec.
Meanwhile, from a high of Tk 2.03 trillion in June 2022, the excess liquidity with banks nearly halved to Tk 1.66 trillion by June 2023 and further dropped to Tk 1.62 trillion by end of February 2024.

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