Bank deposits slow in Feb, yet stay higher YoY at 10.43%

Bangladesh's banking sector experienced a slight drop in deposit growth in February this year, yet it continues to maintain year-on-year growth driven by rising interest rates and remittance inflows.

According to data from the central bank, total deposits reached a staggering Tk16.61 lakh crore in February, reflecting year-on-year growth of 10.43%, which is lower than the 10.57% growth rate in January but significantly higher than the 6.86% growth rate in the same month last year. 

Experts attribute this surge in deposits to a confluence of factors. A key driver is the recent increase in deposit rates. This makes saving more attractive, encouraging individuals and businesses to park their funds in banks.

Additionally, healthy remittance inflows are believed to have played a significant role. Increased foreign currency coming into the country translates to more money available for deposit in the banking system.

The banking sector is experiencing a sustained surge in deposits. Deposit growth has surpassed 10% for three consecutive months, reaching a 28-month high of 11.04% in December 2023. This marks a significant improvement compared to the slowdown observed in September 2021, when the growth rate dipped due to the economic impact of the global pandemic.

All banks, regardless of financial health, have raised deposit interest rates. While established banks typically offer rates between 9% and 10%, some struggling lenders are resorting to much higher rates, reaching up to 12%, to attract deposits. This overall increase in deposit rates, partly driven by the central bank's policy rate hike to 8%, is contributing to the observed growth in deposits across the banking sector.

Bankers say the withdrawal of the interest rate cap allowed banks to offer higher deposit rates, alluring savers to park their money in banks.

Md Murshedul Kabir, managing director at Agrani Bank, told The Business Standard, "At one time, interest rates were very low, which may have been appropriate given the circumstances."

However, with market-based interest rates now in effect, people are showing interest in depositing money in banks. Banks are able to offer higher interest rates as a result, leading to an increase in the growth rate of deposits, he added.

"Deposit growth is attributed to both interest rates and the increase in remittance income," said Syed Mahbubur Rahman, managing director at Mutual Trust Bank.

According to data from the central bank, Bangladeshi expatriates sent remittances of more than $15 billion between July and February of the current fiscal year, which is 7.61% higher than the same period a year ago.

Syed Mahbubur Rahman told TBS, "If there is a positive trend in remittance income, it has a positive effect on deposit growth because a portion of remittances is added to savings. However, due to inflation, the savings of common people are decreasing.

Employment is decreasing in the formal sector while increasing in the informal sector, like agriculture, he added.

This experienced banker also mentioned that banks are increasing the interest rate on deposits due to the rise in interest rates on Treasury bills and bonds.

The increase in deposits has affected the amount of money held by people. According to central bank data, around Tk2.58 lakh crore was in the hands of the countrymen at the end of February, slightly less than in January.

Bankers say when cash held by the public enters the banking system, it accelerates the creation of new deposits and loans. In other words, another way of reducing the cash held by the public is when it returns to banks, thus helping to increase deposit growth.

Managing directors at several public and private banks said the good growth of deposits is attributed to the effect of money printing by the central bank. They mentioned that the rate at which money has been printed and provided to the government has contributed to the growth of deposits.

Furthermore, there are some banks, including Sharia-based banks, which struggle to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) properly according to central bank rules. As a result, the central bank provides support to these banks through various means, including the repo facility and the Islamic Banks Liquidity Facility.

Due to these factors, top bankers state that they are witnessing high deposit growth, and concurrently, inflation is not decreasing.

They say the higher growth seen in deposits is mainly a manipulation of numbers, not real growth. This becomes evident when inflation or other factors are taken into account.