The banking sector anticipates a fresh liquidly crisis as the propensity of clients to withdraw funds has increased in the wake of the coronavirus pandemic and reduced deposit interest rates.
Total deposits of all banks in the country decreased by Tk25,600 crore to stand at Tk12,28,000 crore at the end of April this year from Tk12,53,600 crore in January, according to Bangladesh Bank data.
Industry insiders say May trend would be similar as well because there is a severe crisis of fresh deposits along with a high degree of fund withdrawal.
Moreover, the government decision to raise excise duty by 20 to 25 percent in various slabs on deposits above Tk10 lakh in the proposed budget for the next fiscal year is expected to further discourage depositors to park their money in the banking system.
The deposit shock has come at a time while the banking sector is under multiple pressures of supplying money into the weakening economy.
Banks started to bring down interest rates on deposits to 6 percent from January this year under government dictate to bring down the lending rate to 9 percent.
Banks were releasing high-cost deposits to reduce fund cost amid the pressure of implementing the single-digit lending rate from April 1, 2020.
Amid such a situation, the coronavirus outbreak in March led to a panic withdrawal pressure from depositors, causing a sharp fall in deposit growth, according to industry insiders.
The deposit growth sees a sharp fall of 8 percent year-on-year in April which was 12.59 percent in January, according to Bangladesh Bank data.
The adverse impact of the sharp fall in deposit growth is already evident as 13 private banks witnessed their advance deposit ratio (ADR) cross the authorised limit in April.
These banks are AB Bank, Dhaka Bank, Exim Bank, First Security Bank, National Bank, NRB Bank, Midland Bank, NRB Global Bank, One Bank, Padma Bank, Southeast Bank, Social Islami Bank and Union Bank.
On April 15 this year, the Bangladesh Bank raised the ADR limit to 87 percent from 85 percent for conventional banks and 92 percent from 90 percent for Shariah-based Islamic banks in an effort to boost liquidity amid the Covid-19 pandemic.
In spite of this move, those 13 banks failed to maintain the authorised limit even when banks were lending at the lowest level of 8 percent in April.
Several other banks are also very close to the authorised limit due to a fast fall in deposits, central bank data shows.
The downward trend of deposits in the banking sector gives an indication that private sector credit growth, which remained sluggish for the last one year, will also shrink further in the coming months.
In the new budget, Finance Minister AHM Mustafa Kamal has set the borrowing target from the banking system at Tk84,890 crore. Moreover, banks are burdened with the responsibility to implement a stimulus package worth Tk50,000 crore.
However, Bangladesh Bank Governor Fazle Kabir in his post-budget reaction assured that the banking sector is capable of supplying the targeted borrowing as excess liquidity in banks stood at Tk1,11,300 crore in April.
When excess liquidity came down to Tk89,000 crore in March from Tk100,000 crore in January amid deposit withdrawal pressure, the central bank immediately took a host of measures, including curtailing of cash reserve ratio and increase of ADR limit, to ease liquidity in the banking system.
All these efforts resulted in a Tk24,000 crore increase in excess liquidity in one month.
Although the banking sector has excess liquidity at this moment, it will soon face liquidity pressure owing to the current fall in deposits, argued Mashrur Arefin, managing director of City Bank.
Depositors will not return to park their funds in the banking system in the post-coronavirus era because of low deposit interest rates, he continued, as a result, banks will also shy away from lending to the private sector.
Meanwhile, Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said although there is excess liquidity in the banking system, not all banks are in a comfortable position in terms of liquidity.
Because of liquidity pressure, some banks have already started to offer interest rates on deposits at more than 6 percent, he added.
"If deposit rates go up it will be difficult for banks to lend at 9 percent, which will ultimately hit the private sector credit growth," he maintained.
Industry insiders are also doubtful that the government's move to allow deposit of black money in banks, aiming at increasing money flow into the economy, will yield any positive result. Instead, this measure will add to the crises in the banking sector, they worry.
"The decision will create problems and increase our costs," said Mashrur Arefin of City Bank. He also hinted that they might not accept these untaxed deposits to avoid problems in their business, especially with export and import.
Masrur Reaz, a former senior economist of the World Bank Group, said the facility could have been extended directly to the Covid-19-affected industries, instead of channeling the money to the banks.
"The move will push up the country's risk rating," Reaz said, noting that foreign banks may charge more from local banks for confirming LCs (letters of credit).
Banks are required by anti-money laundering law to strictly follow KYC (Know Your Customer) procedures while opening accounts and monitor every big transaction.
While the banking sector is passing through such a financially difficult period, the finance minister has estimated private sector credit growth of 16.7 percent in the next fiscal year to support private investment.
Private investment growth has been estimated to double to 25.3 percent in the next fiscal from the projected growth of 12.7 percent for the outgoing fiscal.
The minister has also made inflated estimates about growth in exports and imports in the new budget. Export growth target has been set at 15 percent for FY21, while the overall export growth up to May this Fiscal was a dismal (-)18.0 percent with both RMG and non-RMG exports in hot waters, registering negative growth of 19 percent and 12.7 percent respectively.
Meanwhile, growth target for import has been set at 10 percent in FY21, while it posted an 8.8 percent negative growth up to April of the current fiscal year, with capital machinery purchase, vital indicator for manufacturing activities, showing an alarming 33.5 percent decline.