Bank deposits play an important role in the financial intermediation process in the financial system of Bangladesh. Banks transform deposit liabilities to assets by making loans and advances. In Bangladesh, like many other developing economies, bank deposits remain the predominant source of funding for banks, accounting for about 74.5 per cent of bank liabilities in 2019. The growth of banks deposit might associate with a range of supply and demand factors. The demand for deposits comes from banks and depositors supply them. These activities were disrupted during the covid-19 pandemic period. It is observed that overall deposit grew 13.1 per cent (on average) in the last twelve months between July 2020 to June 2021, whereas private sector credit grew 8.6 per cent (on average) for the same period of time. Total deposit stood at Tk 14.20 trillion in FY21 which was 45.0 per cent of Gross Domestic Product (GDP), up from Tk 3.37 trillion in FY10 (42.2 per cent of GDP).
Month-wise data show bank deposit growth was following an upward trend during the covid-19 pandemic period although there were few drops especially at the beginning of the pandemic (chart-1). Point to point estimates shows that bank deposit growth was 11.3 per cent at end-March 2020 went as low as 10.9 per cent at end-June 2020, then gradually were picking up to reach 14.0 per cent at end-June 2021 (although witnessed some fluctuation throughout the period). Generally, income level, consumption behaviour, and interest rates influence deposit accumulation in the banking sector. However, higher deposit growth along with unexpected behaviours of deposit mobilisation during the covid-19 pandemic demands an exploration what are the factors that contribute to deposit upsurge. Against this backdrop, this note will attempt to identify the factors which might contribute to the recent surge in bank deposit growth in Bangladesh.
DECOMPOSITION OF DEPOSITS AND ITS TRENDS: The covid-19 pandemic has caused unprecedented damage to the global economy as well as Bangladesh. Bangladesh's economy which is heavily dependent on RMG export along with foreign remittance was severely affected due to the global economic meltdown. As a result gross domestic product (GDP) slowed down to 3.51 in FY20. To fight back the pandemic, the government and Bangladesh Bank have taken expansionary fiscal and extraordinary easy monetary policy along with Tk 1.35 trillion stimulus packages for economic recovery. Consequently, economic activities rebounded well and GDP increased to 5.47 per cent in FY21 from 3.51 per cent in FY20. Moreover, the government / BB imposed a lending interest rate maximum of 9.0 per cent except for credit cards in April 2020 to facilitate speeding up business activities. On the other hand, banks have slashed deposit interest rates. The deposit interest rate (weighted average) declined to 4.99 per cent in March 2021 from 5.75 per cent in December 2019. The interest rate on fixed deposits which constitutes about 45 per cent of total deposit, decreased to 5.99 per cent in March 2021 from 8.10 per cent in December 2019. Despite decreasing interest rates, banks deposit rose significantly by various factors other than the interest rate. The trend in various categories of banks deposits growth is given in Table-1.
Fixed and saving deposits constitute about 66 per cent of total deposits. During the covid-19 pandemic, the growth of fixed deposits decelerating 7.41 per cent in 2020 from 15.11 per cent growth in 2019. On the other hand, saving deposit growth increased sharply to 20.60 per cent in 2020 from 12.42 per cent in 2019. Some depositors may convert their fixed deposits due to the loss of their jobs/ business in the pandemic time. Besides some people who hold more currencies at the beginning of the pandemic, changed their tendency to hold additional currencies from July 2020, which might contribute to accelerating bank deposit growth as reflected by a sharp decline in currency outside bank data (COB). The currency outside of the bank (COB) is an important determinant of currency demand and is inversely related to deposit growth (C/D ratio). The COB growth was the highest at 33.0 per cent in July 2020 due to pandemic uncertainty and came down to below 10.0 per cent at the end of June 2021. In addition to that share of COB to M2 (broad money supply) is about 13 per cent and the rest (87 per cent) is constituted by demand deposit (DD) and time deposit (TD).
HIGHER REMITTANCES INFLOW: Unexpectedly, remittance inflow has started to increase since the beginning of the covid-19 pandemic in March 2020. Higher remittance inflow contributed to surging deposit growth. In FY21, remittance inflow surged to US$ 24.8 billion (Tk 2101.15 billion) up 36 per cent from the level of US$ 18.20 billion in FY20. A preliminary estimate indicates that the contribution of remittance to deposit is about 15 per cent in FY21. Although remittance inflows contributed significantly to increase bank's deposit, can be considered as a temporary phenomenon as it is highly volatile in nature. Month-wise remittance inflow growth data is evidencing volatility, the highest growth recorded in April 2021 (89.2 per cent), afterwards it started to decelerate to 44.3 per cent in May 2021, and finally reached 6.0 per cent in June 2021.
NATIONAL SAVINGS CERTIFICATE: Recently, the government has streamlined buying of NSC and also adopted ICT infrastructure for issuing certificates and delivering interest payments. For instance, if an individual wants to purchase any NSC, payment has to be made through banking channel (if the value of NSC is above Tk 1.0 lac). As a result, saving account saw an increase recently, partly contributing to higher deposit growth as well. Moreover, mandatory submission of NID and TIN while purchasing NSC along with using common server to impose individual buying limit also facilitate bank's deposit growth. The outstanding NSC stood at TK 4573.56 billion in June 2021 compared to TK 3417.25 billion in June 2020.
AGENT BANKING: Agent banking is another factor that is contributing to total deposit growth. Recent data show that it grew by about 100.0 per cent to Tk 201.79 billion in June 2021 from that of Tk 101.17 billion in June 2020. The total number of agents is 12995 and the total subscribers are 12 million (as of June 2021).
DEPOSIT MOBILISATION BY NBFIS: Deposit mobilisation by NBFIs has decelerated since 2017 owing to the bad perception of depositors for many reasons. Outstanding NBFIs deposit shows a declining trend to Tk 445.35 billion in Q22021 from Tk 468 billion in 2017.
E-MONEY BALANCE: During the covid-19 pandemic, the use of mobile financial services has substantially increased. To minimise the contagious risk of covid-19, contactless payment was very popular using mobile financial services. Almost 39.6 million active account holders are using mobile financial services to avail of inward remittance, cash in the transaction, cash-out transaction, p2p transaction, salary disbursement, utility bill and merchant payment, and government payment. Through these activities, there is some e-money balance accumulated every month which contributes partly to increasing bank deposits. Recent data show that the e-money balance was, on average, Tk 70 billion in FY21. But it increased to Tk 92 billion in June 2021 from Tk 55.81 billion in August 2020.
DECREASING ILLEGAL ACTIVITIES AND DISCLOSURE: During the covid-19 pandemic, many businesses/ entrepreneurs took the opportunity of whitening non-disclosure income. For example, a total of 11,859 people whitened their black money worth Tk 206 billion under a blanket opportunity in the just-concluded fiscal year FY21.
CONCLUSION: The main objectives of the note are to identify the potential sources which contributed to the recent upsurge deposits growth in banks during the covid-19 pandemic period. Both the economic factors (income level, consumption behaviours, and interest rate movement) and other factors ( remittance inflow, streamlining NSC unchanging and interest payment through banks, increasing e-money balance due to increasing trend of MFIs, and expanding agent banking in rural areas) contributed to deposit upsurge.
The note also opined that the recent deposit growth appears a transitory phenomenon. Private sector credit growth is likely to pick up in near future depending on the course of the delta variant (covid-19) situation and economic recovery. It is expected that the movement of deposit and private sector credit growth will be normal in near future. The limitation of the note is that it is a preliminary investigation. A detailed investigation is left for future research.
Md. Ezazul Islam is General Manager, Md. Rashel Hassan, Joint Director, and Md. Abdus Sobhan, Assistant Director, Chief Economist's Unit, Bangladesh Bank. [email protected]