Banks, now surfeit with money, have few takers
Surplus liquidity increased by 34 percent or Tk21,700 crore in three months from March to June
For about one year, banks went through a crunch period, with little money to lend. But now their money in the vaults has ballooned.
Two reasons can explain this phenomenon: there are hardly any takers and, on top of it, banks have become cautious in lending so that more of their money does not turn bad.
Surplus liquidity increased by 34 percent or Tk21,700 crore in the three months from March to June, according to the last available Bangladesh Bank data.
The central bank lags sharply in releasing official data on liquidity, but bankers say their idle money in hand further rose after June and it now stands close to Tk90,000 crore, according to their own estimates.
Excess liquidity refers to the amount that banks hold in excess after meeting all regulatory requirements.
Although the situation shows signs of low credit demand, some bankers see another side to it.
"The rising liquidity indicates that a fund crisis has been easing its way into the banking system and that it will put pressure on the lending rate," said Md Arfan Ali, managing director of Bank Asia.
Though the average lending rate is still 10 percent plus, the rising trend of excess liquidity is a hint of its not increasing any further, he argued.
Arfan Ali said it would now be easier for banks to implement the single-digit lending rate.
He also pointed out that banks were exercising caution in lending in the wake of increasing non-performing loans (NPLs). On the other hand, investors were being very careful in expanding their businesses.
As a result, he observed, private sector credit growth had slowed down.
"However, slow credit growth will not hamper private sector investment but will instead ensure growth in quality credits," Arfan asserted.
Private banks have mostly contributed to the increase in surplus liquidity. These banks accounted for 78 percent of the total increased amount of excess liquidity.
The lending rate went up to 14 percent at the beginning of last year when the banking sector was passing through a serious liquidity crisis.
Aggressive lending led to a liquidity crunch given that most of the banks were lending beyond their authorised limit of advance deposit ratio. Private sector credit growth peaked to above 19 percent in November 2017, which again was a reflection of aggressive lending.
In April last year, the then finance minister AMA Muhith cut the cash reserve ratio (CRR) by one percentage point to 5.5 percent in the face of pressure from bank directors.
The reduction in CRR included an additional Tk20,000 crore in the banking system in June last year, but that did not prove adequate to meet the crisis.
The private banks, shying away from lending, went aggressively on a hunt for deposits at high interest rates.
As a result, deposit growth saw a moderate growth of 11.39 percent in August. On the other hand, private sector credit growth maintained a downward trend and hit 10 percent in November, the lowest in recent history.
Amid this situation, the government has kept pressurising the banks to bring down their lending rate to single digits to facilitate industrialisation.
The government recently formed a committee to explore the means of how to implement the single-digit interest rate.
Additionally, it set a deadline for the implementation of the single-digit lending rate from January next year.
Meanwhile, the rising surplus liquidity in the banking system has put pressure on the deposit rate. Most of the banks, except for some problem-hit ones, are taking deposits at 6 to 7 percent interest rates.
A top executive of a private bank said that the bank lent to a business group at a rate of 10.5 percent last week.
However, most of the loans are still being given at higher rates, he said.
Imposing tax on government's savings instruments has also helped ease the liquidity crunch in the banking sector as depositors have shifted their money to banks from saving certificates, according to industry insiders.
Central bank data suggest that savings deposits grew by 5.14 percent in the second quarter of the current year from those in the previous quarter.
Cautious lending brought down the advance deposit ratio of banks to within the authorised limit of 85 percent in September.
"The government has been putting undue pressure on banks for bringing down the interest rate to single digits, but it will automatically go down if the market remains liquid," said Faruq Mainuddin Ahmed, managing director of Trust Bank.
The low demand for credit is not a result of high interest rates. Rather it has been happening due to slow economic activities, as he summed up the situation.