Banking sector flush with Tk 1.90t in excess liquidity

The banking sector in Bangladesh, once facing a liquidity crisis, is now seeing a surplus, holding Tk 1.90 trillion in excess liquidity, according to the Bangladesh Bank (BB).

This shift is being attributed to a rise in depositor confidence following the recent political changes in the country.

Despite the renewed trust, private credit growth has slowed to 9.46 per cent year-on-year in August 2024, contributing to the increased liquidity within the banks.

The central bank’s latest data indicates that 46 banks -- comprising four Sharia-based and 42 conventional institutions -- currently have excess liquidity.

Among these, Sonali Bank stands out as the top holder of surplus funds, followed by Agrani Bank, Rupali Bank, Janata Bank and the Bangladesh Development Bank (BDBL).

The BB noted that depositors are showing a marked preference for public sector banks over private institutions, as they perceive them to offer greater security for their hard-earned money.

This shift has driven a surge in deposits at public banks.

Conversely, the situation in several Sharia-based banks remains less favourable.

Following the acquisition of multiple banks by large conglomerates such as the S Alam Group, a number of depositors withdrew their funds from these institutions.

Allegations of large-scale loan defaults involving groups like S Alam, Beximco, and Sikder Group have left some Sharia-based and conventional banks struggling with liquidity shortages.

However, the broader banking sector remains stable, with most banks retaining sufficient liquidity for investment, as noted by a senior BB official.

Policy Impact on Private Credit

The vice president of the Bangladesh Association of Banks (BAB), Muhahhad Abdul Mannan, explained that the drop in private credit growth can be attributed to the BB’s contractionary monetary policy, aimed at controlling inflation.

Higher interest rates and fluctuations in the exchange rate of the local currency have also discouraged entrepreneurs from seeking new investment opportunities. This has led many banks to redirect their excess liquidity into government bonds and bills.

Mannan, who previously served as Managing Director of Islami Bank before its takeover by the S Alam Group in 2017, stressed that banks are turning to safer investments in treasury bills and bonds due to the stagnation in private sector lending.

Banking Sector Stability

Syed Mahbubur Rahman, Managing Director and Chief Executive Officer of Mutual Trust Bank PLC, reiterated that most banks in the country have ample liquidity. The reduction in private sector credit demand has led many to turn to investments in treasury instruments, as per standard banking practices.

Mahbubur Rahman also highlighted that cash in circulation outside of banks is decreasing, while deposits are increasing due to more competitive interest rates being offered.

BB’s Executive Director and spokesperson Husneara Shikha added that stronger financial institutions are supporting weaker banks with financial aid.

As a result, the central bank has ceased printing currency to provide liquidity support to struggling banks, reflecting the sector’s overall stability.