Excess liquidity in banks: A blessing or curse?

Who will be unhappy if he or she has plenty of money all around him or her? There is no reason to be unhappy at all as he or she can sleep with it but unhappiness arises if he or she starts believing that this money below the pillow will produce no money. Rather it will be eaten up by inflationary effect. Its purchasing power will be diminished day by day.
When we find in the national dailies that excess liquidity in the banks stands at Tk.940 billion recently and private investment in the country goes down, we can merely be happy with a thought that we have money in the banking sector at least. But side by side, we become afraid of thinking why the economy is overburdened with excess liquidity when it was facing liquidity crises just a year back.
Everybody knows that during 2009-2012 years, the banking sector was facing severe crisis of liquidity as the demand for investment was huge. Then some banks used to borrow money from the depositors at 14 per cent rate of interest. The banks used to borrow money from The Bangladesh Bank as sometimes the call money market was very high and sometimes it was difficult to get money from the call money market. But now the situation is just reverse. Now almost all the good businessmen neither ask for fresh loan nor are willing to utilise their full sanctioned limit. They are taking the policy of 'wait-and-see'. If political environment turns good, they will invest. Otherwise they will keep silent.
Liquidity is good for the economy but is excess liquidity good? Everybody will agree with us that excess liquidity is a sign of economic stagnation. If money is invested in the productive sectors, it will create the scope of employment increasing productivity along with real income and savings thereafter. Savings is again invested. It is a cycle of the economy. In this way, economic growth and development take place. The size of the economy gets bigger day by day. It is a matter of great fear that the real business people of the country are not coming forward to invest in the productive sectors, new employment opportunities are not created in one hand and new labour force is being added to the existing workforce resulting in a worst scenario. And the bankers who have borrowed and still are borrowing money from the depositors at a higher rate are in a vulnerable position with the huge burden of excess deposit.
Investing in the call money market at the rate of 5 per cent-7 per cent and in the government securities at below 10 per cent is not feasible for the banks. So it is very likely to go for investing in non-productive sectors and some banks are moving towards it.
It will certainly increase the inflationary effect and so the Bangladesh Bank has come to take control of excess fund and thus bringing back the money into their custody through reverse repo at a very lower rate i.e at 5.25 per cent. The banks finding no other alternative have been inclined to invest in the government bills and bonds at a lower interest rate.
It may be thought that actions of the BB as the central bank of the country will tackle inflation in the economy in the short run but in the long run, nothing can be an alternative to investment.
The banks are flooded with excess liquidity mainly because of poor investment, lower credit growth and non-expansion of businesses which is a cumulative result of several months' long political unrest, uncertainty, very unpredictable law and order situation, high bank interest rate, coupled with low infrastructural facilities, corruption in different sectors etc. Up to March this year i.e during 9 months of this current financial year Tk.308.49 billion has been disbursed as term loan which is Tk.11.66 billion less than that of the same period of previous year.
 It is to be noted that some big businesses are borrowing money in the form of foreign currency loan from outside the country at a lower rate. They previously used to get the money from the local banks. It is also a pressure of low credit demand to the local bank.
An economy's rate of progress is proportional to its rate of investment. Slow-down in investment will certainly slow down the development process. The GDP growth which has been nearly stable at 5-6 per cent over the years can be less this year if the mountains of unutilised fund persists or if it is not invested in the productive sector.
The present government will have to create a congenial investment environment so that local as well as foreign investors do not feel themselves lukewarm about making investment in Bangladesh. Otherwise, excess liquidity, without bringing fortune, may bring curse to the economy.
The writer is a banker.
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