Growth of currency outside banks triggers concern

The volume of currency outside the banking system has grown significantly in recent months ahead of the national elections, raising suspicion about the use of such money.
The currency outside the banking system rose by 14.06 per cent or Tk 156.41 billion to Tk 1268.83 billion until November last calendar year from Tk 1112.42 billion in the same month of 2016, according to the central bank's latest statistics.
It was Tk 1131.53 billion in December 2016.
Senior bankers and experts, however, expressed concern over high growth currency outside the banking system and said flow of funds in excess of normal volume in the banking system will largely help meet the growing demand for liquidity.
The presence of more than usual amount of currency outside the banking system has also affected the deposit growth than that of credit in the recent months, according to banking-sector insiders.
Besides, the widening gap between credit and deposit growth continued in 2017 as many people with surplus funds stayed away from banks due to lower interest rates, they added.
The deposit growth had been on a slide, falling from 13.13per cent on December 31, 2016 to 10.94 per cent on June 30, 2017 and 10.62 per cent on December 31 last.
On the other hand, credits climbed to 18.10 per cent, as on December 31, from 15.98 per cent on June 30 last calendar year. It was 15.32 per cent as on December 31, 2016.
There are different views about the problem, ranging from the hoarding of currencies as 'mattress money', manipulation of invoices for both capital and other goods by using different techniques, and purchase of foreign currencies from unofficial channel -- generally known as kerb market -- to transfer funds outside the country using illegal channels.
Besides, a substantial amount of funds has been kept aside from the banking channel deliberately with a view to spending the same during the upcoming general election, it is suspected.
Sources, however, said informal markets have been operating in Thailand, Singapore, Malaysia, Pakistan and a number of other countries, particularly involving exchanges of 1000-and 500-denominated Bangladesh Taka (BDT), besides India.
However, the official sources wouldn't agree with the contentions about the flight of the local currency for use in informal markets abroad. They say the BDT is not convertible under capital account.
But the sources did not contest the view about some amount of the money lying outside the banking system being used to buy particularly the cash US dollar from the informal market during the period to avoid the hassle of taxmen as well as the existing anti-money-laundering act.
The demand for the greenback on the kerb market has increased because of such practices, pushing up the exchange rate of the US dollar against the BDT.
The greenback sold at nearly Tk 84.00 on the informal market on Sunday. It was Tk 81.00-Tk 82.00 six months before, a currency trader said.
The overall situation is expected to be changed gradually as the banks particularly private commercial banks (PCBs) are now collecting deposits offering higher interest rates to meet their growing demand for liquidity.
As part of the moves, some PCBs have already increased the interest rates on deposit to meet their growing demand for funds while others banks are set to raise their deposit interest rates from the next month, according to the insiders.
"The overall situation on deposit may improve gradually as the central bank had taken different measures including slashing the limit of advance-deposit ratio (ADR) recently," a senior official of the Bangladesh Bank (BB) told the FE.
All banks' aggregate deposits, excluding inter-bank balance, rose modestly to Tk 10.22 trillion as of December last from Tk 9.52 trillion as of June 30, 2017. It was Tk 9.09 trillion as of December 2016.
On the other hand, their outstanding loans, excluding inter-bank balance, shot up to around Tk 8.50 trillion as of December 2017 from Tk 7.45 trillion six months before. It was Tk 6.86 trillion as of December 2016.
The ADR of all banks is re-fixed at 83.50 per cent for conventional banks and at 89 per cent for shariah-based Islamic banks. The existing ratios are 85 and 90 respectively.
The banks have to make adjustment gradually by December 31.
Talking to the FE, Salehuddin Ahmed, former governor of the BB, said the bankers cut down their interest rates on deposits, particularly long-term ones, collectively, which was bad.
"Depositors, particularly small ones, have lost interest in making further deposit with the banks mainly due to lower interest rates on deposits and prefer to invest in the government savings instruments," Dr. Ahmed said to explain the imbalances.
Besides, the falling trend in the interest rates on deposits has affected the saving habit of the people, prompting them to spend on consumption, he added.
The former governor also said a growing number of loan scams that occurred in both public and private commercial banks triggered panic among people, which ultimately leads to a lack of confidence in the safekeeping of their hard-earned money.
"The higher growth rate of currency outside the banking system may push up the inflationary pressure on the economy in future," Mustafa K Mujeri, former Director-General of the Bangladesh Institute of Development Studies (BIDS), told the FE.
Mr. Mujeri, also former chief economist of the central bank, suggested that the policymakers should take effective measures to decrease 'incentives' for holding cash.
Md Ali Hossain Prodhania, the newly appointed Managing Director (MD) of Bangladesh Krishi Bank (BKB), advised the banks to avoid 'aggressive' lending for minimizing credit risks.
"The banks should come to productive sectors moving out from the less-productive ones to help in achieving maximum economic growth by the end of this fiscal year," Mr. Prodhania, also Chairman of the Technical Committee of Bangladesh Foreign Exchange Dealers' Association (BAFEDA), told the FE while explaining how to ensure the quality of credits.

[email protected]