Money outside banking channel on the rise

The amount of money outside the banking channel, which means cash in hand, has increased significantly in recent months mainly because of the inflationary pressure.

About Tk 2,39,998.20 crore was outside the banking system at the end of September this year, up from Tk 2,09,618.40 crore in September last year, according to the latest data from Bangladesh Bank (BB).

Over the past year, currency outside banks has risen by 14.49 per cent. However, the figure was highest at Tk 2,42,026.20 crore in July this year.

Nowadays people are withdrawing their deposits from banks because the real interest rate on deposits went negative due to inflationary pressure, said industry insiders.

The country’s inflation rate reached 9.10 per cent in September, as per data from the Bangladesh Bureau of Statistics (BBS). It, however, dropped to 8.99 per cent in October.

People are keeping more cash in their hands than in previous years because of the ongoing economic crisis period, said Syed Mahbubur Rahman, managing director (MD) and CEO of Mutual Trust Bank.

He said that savers are withdrawing deposits from the banks because the yield against deposits has been eaten by the growing inflation.

This is a very concerning situation. People are now searching for a more suitable place for investment instead of banks, he added.

The increasing volume of currency outside banks has created pressure on the banks’ deposit growths. Between July and September of this fiscal year, banks have lost Tk 11,005.20 crore as demand deposits.

At the end of September, demand deposit in the banking system was at Tk 1,78,450.60 crore, down from Tk 1,89,455.80 crore in July of this fiscal year, as per BB data.

Small depositors are now withdrawing their money from the banks to cover their living expenses, which have spiralled out of control due to the rising prices of essential commodities, said Dhaka Bank MD and CEO Emranul Huq.

He said that the high growth of cash outside the banking system is also putting pressure on the surplus funds of the banks.

Excess liquidity in the country’s banking sector fell to Tk 1,74,000 crore in August from Tk 1,89,000 crore in July, as per BB data. The surplus liquidity was at Tk 2,11,506 crore in January this year.

Echoing the bankers’ concerns, Policy Research Institute of Bangladesh Executive Director Ahsan H Mansur said that there are two reasons behind the growing trend of currency outside the banking sector.

The first reason is that now people are holding onto more cash because they have to spend more than what they used to before to buy the same number or amount of products, the economist pointed out.

“The second reason is that now banks are offering interest rates that are lower than the inflation rates against deposit products,” he added.

The weighted average deposit rate in banks stood at 4.09 per cent in September this year while the inflation rate was at 9.10 per cent in the month, as per BB data.