Panic withdrawal, savings squeeze reduce banking liquidity

Liquidity situation of banks continues to be under stress as total liquid assets in Bangladesh's banking system declined 5.92 per cent in October compared to June 2022 position.

According to the monthly update for November on the country's major economic indicators, released Wednesday by Bangladesh Bank, the total liquid assets stood down at Tk 4.15 trillion in October but the figure was significantly higher at Tk 4.41 trillion as of June 2022.

The minimum required liquid assets of the scheduled banks at the end of October were Tk 2.45 trillion. It means the volume of excess liquidity in banks plummeted to Tk 1.69 trillion from almost Tk 2.0 trillion recorded in June last, the data show.

At the same time, total liquid assets in excess of maintained SLR also declined 0.43 per cent in October compared to the previous months following gradual increase in credit demand alongside Bangladesh Bank's recent intervention in the foreign-exchange market with sale of the US dollar.

Seeking anonymity, a BB official says the total liquid assets of the banks comes down mainly due to factors like NPL buildup, recent negative developments in the banking system that led to mass withdrawal of liquidity from vaults and negative growth in deposits.

Citing latest data from the monthly update, the central-bank official says the trend of currency outside banks is moving upward as a total of Tk 2.0 trillion had gone outside the banks till October 2021 but the amount shot up to Tk 2.36 trillion as of October 2022.

"It means withdrawal of money from the banking system continues growing. This is one of the reasons behind the mounting pressure on liquidity situation of the banks."

In terms of group-wise banks, unconventional banks witnessed the highest fall in total liquid assets by 17.60 per cent followed by state-owned banks (11.86 per cent) and conventional private banks (3.0 per cent).

On the other hand, total liquid assets in foreign and specialised banks rose by around 17 per cent and 3.75 per cent respectively.

Talking to the FE, Managing Director and Chief Executive Officer of Social Islami Bank Limited (SIBL) Zafar Alam said the recent negative news against the banking system created some sorts of panic among people that led some quarters to take out money from the system.

"But things started improving and the fear is gradually going away. I think it will not prolong further," he said on a note of optimism about a turnaround.

Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman points out that cost of living has gone up significantly in recent times because of the inflationary pressure. To meet the additional expenses, people are less concentrating on savings.

On the other hand, a group of people are probably withdrawing money from banks and investing in other areas like real state and housing for getting higher returns.

"These are probably some of the reasons behind the fall in total liquid assets in banks," he says.

Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz says there is a clear indication that panic withdrawal is happening on the financial market following the recent reports over loan-related irregularities published in local media.

"As a result, people's trust on the banking system is impacted adversely and those who withdrew the money are observing the situation keeping those in their hand or some might convert those into foreign currencies to have higher gains on speculation that the exchange rate would increase further," he adds.

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