Worrying trend of money outside banking channel

The country has been in the throes of myriad crises over the past six months or even more. To many, the crises stemmed mainly after the Ukraine-Russia war plunged the world economy into a deep crisis. As we are not isolated from the global community, very naturally it has had an incredibly negative impact on our economy too.

Outside of this view some observers and economists believe that the crises, especially the economic crisis, in our country don’t solely lie in the global economic downturn. But fact remains that we are embroiled in a deep crisis.

Undoubtedly the economy is in tattered condition that we all have been observing for quite a long time. The solution is not still in sight as the crisis seems to be intensifying every moment. Inflationary pressure is very much visible as it has affected every aspect of the lives of people.

This inflationary pressure is compelling people to keep cash in their hands to meet the demand for daily essentials at much higher costs. The economic downturn began to be visible in the month of June when the cash in hands started growing significantly.

A Bangladesh Bank data showed the amount of cash outside the banking system stood at Tk2, 36,448 crore in June 2022 while it was Tk2, 09,517 crore in June 2021.

A report published in The Business Post yesterday showed the growing trend of the money being kept in the hands of people. According to the report, About Tk2, 39, 988.20 crore was outside the banking channel towards the end of this year. The cash amount in the hands of people was Tk2, 09, 618 crore in September last year.

Just in a little bit over a year, the money outside the banking channel rose by a staggering 14.49 percent although it should be stated that Tk2, 42, 026.20 crore was in the hands of people in the month of July. The increasing volume of money being circulated outside banks is putting immense pressure on the growth of the deposits of banks.

During the period from July to September this fiscal year banks lost Tk11, 005.20 crore as demand deposit. As per the Bangladesh Bank data, at the end of September, the demand deposit at the banks plummeted to Tk1, 78, 450.60 crore from that of Tk1, 89, 455.80 crore in the July of the same fiscal year.

Why is the money being transacted in cash rather than banking channel? The plain answer is people can’t put their faith in banks as the inflation rate is more than the deposit rate. The rising prices of essentials are forcing people to withdraw the money they have deposited in their bank accounts.

Again when the deposit rate is less than the inflation rate people tend to get more cash in hands as a precautionary measure limiting the money circulation in the banking system. Bankers are also concerned about the increasing trend of money being circulated outside of the banks.

Echoing the bankers’ concerns Policy Research Institute of Bangladesh Executive Director Ahsan H Mansur cited two reasons behind the trend. Firstly, people are keeping more cash in their hands than ever before because they need the money to buy their daily essentials at higher costs. Secondly, banks are offering lower interest rate on deposit products than the inflation rate.

It is an ominous sign for the economy if the trend can’t be reined in now. The central bank, Bangladesh Bank, and the authorities concerned in the government should take immediate steps to stop money going out of the channel of the banking system. If they fail to do so, people may experience something much worse in the days to come.