Banks are flooded with excess liquidity after having made a record Tk1.95 lakh crore in November 2020.
The excess cash will raise banks' costs to safeguard their customers' money.
The liquidity glut is invested in government treasury bills and bonds that give banks lower returns in comparison to their deposit costs.
The interest rate of short-term treasury bills for three months came down to below 1% in December which was nearly 7% in June last year.
Burdened with excess liquidity, banks are now actively looking for investment tools. Their participation in auctions for new Islamic bonds demonstrates their investment behaviour.
At the first auction of Tk4,000 crore Sukuk bonds held in December, the Bangladesh Bank received applications of Tk15,000 crore from banks.
A Sukuk is an Islamic financial certificate, similar to a treasury bond, that complies with Shariah laws.
The banks will be able to earn 4.39% interest from their Sukuk investments.
High foreign currency inflow through remittances amid low import expenditures mainly shot up excess liquidity, said industry insiders.
The central bank purchased $5 billion, worth Tk46,563 crore, in the first six months of the current fiscal year – which was nearly seven times higher than its purchases in the entirety of Fiscal Year 2019-2020.
The dollar purchase was part of the Bangladesh Bank's intervention in the foreign exchange market to keep the dollar rate stable.
The dollar price remained stable at Tk84.80 in the current fiscal year, according to the central bank's data.
The monthly average remittances were $2 billion, since July, taking the foreign exchange reserves to above the $43 billion mark.
Meanwhile, deposits kept up their strong growth even amid negative returns as the provision of allowing black money in deposits in the current budget encouraged the rich to park their funds in the banks.
The government, for the first time, allowed the investment of black money in the banks to ease liquidity pressure, help implement the stimulus package and support high bank borrowing.
According to a new provision, black money can now be invested in cash, bank deposits, financial schemes and instruments, as well as all other types of deposits – saving deposits, saving instruments or certificates – but is subject to a 10% tax.
Banks are already reflecting the outcome of the provision as deposit growth was over 13% year-on-year in October when the average deposit rate had been below that of inflation.
The average deposit rate came down to 4.64% in November when inflation was 5.73%, the central bank's data shows.
Though the banks are awash with excess liquidity and economic activities have started in full swing, private sector credit growth has remained sluggish. It dipped to 8.21% in November last, far lower than the monetary target of 14.8% set for the current fiscal year.
Mostly the high remittance inflows pushed excess liquidity to its highest level ever, said Md Habibur Rahman, executive director (Research) of the Bangladesh Bank.
He said the decline in commodity prices globally amid the pandemic saved the import costs for Bangladesh, and as a result, though the imports declined in terms of value, they increased in volume instead.
The Bangladesh Bank is not concerned about the excess liquidity as it will not put much pressure on inflation when global inflation is downward.
"Economic activities have started in full swing as the use of electricity and gas have reached their pre-pandemic levels," Habibur Rahman said, adding that though private sector credit growth is still down, 8% growth is good enough for the economy.
Bank Asia Managing Director Md Arfan Ali said banks are now in trouble with excess liquidity as it will increase their costs.
However, the positive aspect of excess liquidity is that it will enable banks to lend at between 7% and 8% in the new year which is a big opportunity for businesspeople to avail themselves of low-cost financing.