Bank deposits in Bangladesh surge on higher interest, lower investment

Bank deposits are on the rise, buoyed by elevated interest rates – as high as 9% – offered by lenders grappling with a liquidity shortage.

Beyond the higher interest rates, bankers point to a pre-election deceleration in investment activity as a key driver behind the surge in deposits within the banking sector.

Central bank data for October 2023 reveal a nearly 10% increase in bank deposits, totalling Tk12,852 crore. Of this, Tk7,562 crore originated from outside the banking system. As a result, the overall deposits in banks reached Tk16.36 lakh crore in October, up from Tk16.23 lakh crore in September.

Emranul Huq, managing director and CEO of Dhaka Bank, told The Business Standard that certain loan scandals in Shariah-based banks in November last year prompted depositors to withdraw their funds, impacting the overall deposit growth in the banking industry.

However, he noted a gradual restoration of confidence among the public, with depositors once again entrusting their funds to banks.

He mentioned that since the lending cap was withdrawn in June, the interest rates on loans have been increasing in line with rising Treasury bills and bond rates. As a result, many banks are now collecting deposits at higher rates, prompting depositors to keep their cash in banks.

He also said various investments are declining due to political uncertainty ahead of the upcoming national elections. Additionally, there is global economic uncertainty, contributing to a decrease in credit growth. Consequently, industrial factories are accumulating bank deposits due to reduced spending on immediate purchases of goods and workers' salaries.

Bankers say the net growth in credit to the private sector was less than 10% over the last year. If the country's economic activity had been normal, this debt growth would have been more than 15%, they say.

In October, private sector credit grew 10.09% year-on-year, compared to nearly 14% in November last year.

A managing director of a bank told TBS, "Banks are now able to offer higher rates to depositors. Currently, banks are providing more than 9% of term deposit collections, leading to an increase in deposits."

He also mentioned that the weighted average interest rate of deposits is still less than 5%, even though inflation is almost twice as high. However, some banks, through "unwritten" practices, offer higher rates, leading depositors to keep their money with them.

According to the central bank report, the year-on-year growth rate of deposits in January this year was 6.14%, which increased to 8.40% in June. By October, deposit growth had reached 9.79%.

The report indicates that the weighted average interest rate for deposits in banks was 4.29% in January. Subsequently, the deposit rate gradually increased, reaching 4.55% by October. However, some banks, grappling with a liquidity crunch, offer rates as high as 9–10%.

In the current fiscal year, the central bank has shifted to an interest-based monetary policy so that the money market regulator can control inflation by adjusting the policy rate and managing the money supply.

The country's inflation dropped to a seven-month low of 9.49% in November, marking a notable decline from October's 9.93%.

In a press statement last month, the central bank announced its commitment to reduce inflation to 8% by December through the continuation of a contractionary monetary policy. Furthermore, the bank aims to bring inflation down to 6% by June next year.

A central bank official emphasised the need to tighten the money supply to control inflation. Achieving this requires an increase in interest rates on all types of loans.

To facilitate this, the government is obtaining loans at higher rates through successive Treasury bills and bonds, subsequently leading to an increase in customer loan rates. Additionally, the central bank is raising the rate of liquidity facilities provided to banks, he added.

On 26 November, the Bangladesh Bank increased its policy rate by 50 basis points to 7.75%. The policy rate saw an increase of 125 basis points in less than two months.

Individual holdings are returning to banks  

Since January this year, the amount of money held by individuals outside banks were increasing for months due to the disclosure of irregularities in banks and runaway inflation. However, this trend has been decreasing exponentially in the last few months.

In January, the amount of currency outside banks was Tk2.62 lakh crore. By June, it had risen to Tk2.91 lakh crore. However, since June, it has been continuously decreasing. In July alone, Tk25,000 crore of individual holdings returned to banks. As of the end of October, the amount of currency outside banks stood at Tk2.45 lakh crore.

A high official at City Bank told TBS that individual holdings tend to increase when the deposit rate is low and investment is high. However, the current scenario has seen an increase in deposit rates and a decrease in investment, prompting the return of cash to banks.

He emphasised, "People are now depositing their money in banks due to the rising costs of flat and plot registrations and concerns about the security risks of keeping money at home."

Additionally, he pointed out that approximately Tk36,000 crore went out of the banking system suddenly in June during Eid-ul-Azha celebrations. During that period, businessmen chose to keep the proceeds from the sale of sacrificial animals at home.