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Excess cash reserves in the country’s banking sector have fallen drastically due to a multitude of factors, including forex crisis, lackluster recovery of loans and growing credit demand following pandemic shock.
At the end of April of this year, excess cash reserves in the banking sector stood at Tk 20,400 crore, down by 57.67 percent when compared year-on-year, as per the latest data from the Bangladesh Bank.
The excess cash reserve – which is an amount of funds the banks hold in cash – was at Tk 26,500 crore in March this year and Tk 48,200 crore in April of 2021.
Due to the ongoing liquidity shortage, most banks are currently taking liquidity support from the central bank and inter-bank call money market. The inter-bank call money rate rose to 5.01 per cent on Wednesday, from 4.98 percent a day ago, mentions the central bank data.
The call money rate – which is the interest rate on a type of short-term (overnight) bank-to-bank loan usually taken during emergency situations – has been hovering around at 5 per cent in the last few months due to the banking sector’s liquidity shortage.
Along with the inter-bank call money market, most of the banks are also taking liquidity support from the central bank through repo, said a senior official of the central bank’s debt management department.
On June 19, six primary dealer banks took Tk 1,800 crore as liquidity support from the central bank, shows the central bank data.
Eight banks – Islami Bank Bangladesh, First Security Islami Bank, Standard Bank, Premier Bank, IFIC Bank, AB Bank, Social Islami Bank and Exim Bank are holding 70 percent of total excess cash reserves in the banking sector.
Other private and state run banks are holding the rest – 30 percent excess cash reserves.
Central bank officials said the banks are facing liquidity shortage because of the forex crisis, lackluster recovery of loans from the borrowers, the increasing trend of government bank borrowing and growing trend of credit demand after the second Covid wave.
Echoing the same, Dhaka Bank’s Managing Director and CEO Emranul Huq told The Business Post that the continuous depreciation of local currency against the USD is putting pressure on the banking sector’s excess funds.
The taka depreciated by 8.08 percent against the USD in this year mainly due to the Russia-Ukraine war. The inter-bank exchange rate stood at Tk 92.95 per USD on Wednesday.
Emranul said the growing private sector credit growth and the increasing trend of government bank borrowing are also the reasons behind the drastic fall in excess funds.
In May, private sector credit growth accelerated to 12.94 percent, the highest since January 2019, when it was 13.20 per cent, as per the central bank data.
On the other hand, the government borrowed over Tk 41,444 crore from the banking sector from July to June 14 this FY, up by 58.92 percent compared to FY21.
Dhaka Bank’s managing director said most of the banks now are facing big challenges due to the lending rate cap.
“Banks have to offer higher interest rates than before to mobilise deposits. But the highest interest rate on lending is 9 per cent, as a result, the banks’ profit margin has narrowed,” he pointed out.
Mercantile Bank’s Additional Managing Director Mati Ul Hasan said the continuous USD selling spree of the central bank has put pressure on the banks’ liquidity.
The central bank has so far withdrawn over Tk 65,000 crore from the banking sector against selling over $7 billion to banks, so that they can cover their USD shortage for import payments, senior Bangladesh Bank officials said.
Bangladesh’s import payments rose by 48.25 per cent to $67.86 billion from July to April of the current FY.
Hasan said, “A bank’s main income comes from the interest margin, which has been impacted by the interest rate cap. I hope that the cash crisis will be mitigated in the coming days.”
