The growth of time deposit, which is the core source of fund flow for a bank, declined by 3.51 per cent at the end of 2022 compared to the same period in 2021 due to several reasons that have left bankers worried.
The time deposit growth rate was at 5.16 per cent at the end of December 2022, according to the latest data from Bangladesh Bank (BB). It was 8.67 per cent at the same time in 2021. According to BB data, time deposits in December 2022 saw an increase of Tk 23,210.20 crore. It was Tk 56,257 crore in the same month of 2021.
At the end of December 2022, the total deposit in the banking sector was at Tk 14.89 lakh crore and Tk 13.05 lakh crore of it, or 87 per cent, was time deposit.
Nurul Amin, the former president of the Association of Bankers, Bangladesh, told The Business Post said that the major reason behind the decrease is the rising cost of living fuelled by the high inflationary pressure. “Capital flight can also be a factor. But we don’t have that information or data.”
Echoing his concerns, Towfiqul Islam Khan, senior research fellow of the Centre for Policy Dialogue, also said that people’s lack of confidence in banks is another key reason behind this decline in time deposit growth.
“For example, there have been controversies in some Shariah-based banks and their depositors withdrew their money in a panic. Such incidents played a major role,” he added.
The latest data also showed that people withdrew a significantly higher amount of money from the banks last year compared to the previous year. In December 2022, currency outside banks grew by 27.27 per cent to Tk 2.68 lakh crore. In December 2021, the amount had grown by 12.21 per cent to Tk 2.11 lakh crore.
In April 2020, after a 9 per cent lending rate cap was imposed, banks cut the deposit interest rate to 6 per cent. As a result, taking inflation rates into account, depositors did not get good returns in the last two years.
Not only that, the return is negative at present because the average inflation rate has been close to 9 per cent for several months and the interest rate on deposits is 6 per cent, which means the real return is at a negative 3 per cent.
“I think this negative return has also played an important role behind the decline in time deposit growth,”
Towfiqul said that interest rate caps on both deposits and loans could become market-based as a way to tackle this decline.
Why time deposit is important?
The time deposit’s tenure is one month to a maximum of two years. This means a bank can hold this money for a specific period, which is not possible for demand deposit, said bankers and experts.
This type of deposit is usually used by banks to disburse loans and that is why it’s very important for the banking sector. If time deposit growth declines, the sector and overall economy get affected since most businesses in Bangladesh are dependent on bank loans for capital.
Former banker Nurul said that as the capital and bond markets are not strong at the moment, there is pressure on banks to provide all the capital for new businesses.
“If time deposit decreases, the lending capacity of the banks drops. As a result, the banks’ business will be hampered and there will be a crisis of necessary credit for businesses,” he added.
Meanwhile, the declining overall deposit growth is reducing excess liquidity in the banking sector.
At the end of December 2022, excess liquidity in banks decreased by Tk 71,000 crore to Tk 1.45 lakh crore, from Tk 2.16 lakh crore at the end of December 2021.
However, Private sector credit growth increased in December 2022, despite the decline in deposit growth, to 12.89 per cent from 10.68 per cent in December 2021.
Bankers believe this increase happened mainly because the cost of doing business went up due to the increase in fuel and import costs and post-Covid-19 pandemic economic demands.