Excess liquidity in banks falls to Tk1.74 lakh crore

Excess liquidity in banks decreased by approximately Tk6,000 crore in August compared to July following some steps taken by the Bangladesh Bank to control inflation in line with its contractionary policy stance.

The central bank ceased printing money to lend the government amid continuous sale of dollars from the reserves. The government is paying the central bank back by borrowing from commercial banks, which also fuels the liquidity stress.

According to central bank data, excess liquidity in banks reached Tk1.74 lakh crore at the end of August from Tk1.80 lakh crore a month ago. The decreasing trend in excess liquidity is likely to continue even in September, BB officials said.

The excess liquidity is calculated after maintaining the required statutory liquidity ratio (SLR) and cash reserve ratio (CRR). It is mandatory for banks to maintain 4% CRR of total deposits in cash form and 13% SLR in non-cash form with the Bangladesh Bank.

The excess amount, however, remains invested in government bonds through which the government borrows money from the banking system.

The central bank is now selling an average of $70 million daily from its reserves. As a result, an average of Tk774 crore enters the BB from the market daily. This has led to a decrease in liquidity held by the banks.

According to the central bank, $3.75 billion was sold from reserves to state-owned banks in the first three months of the current fiscal 2023-24. In other words, the sale of these dollars from the market has led to approximately Tk41,000 crore flowing into the central bank. This has caused banks to experience liquidity stress.

According to central bank data, between July and September, the government borrowed Tk25,709 crore through treasury bills and bonds from banks and paid back Tk29,487 crore to the Bangladesh Bank.

In other words, the government is borrowing money from commercial banks and repaying it to the central bank, which typically reduces the money supply.

In the first three months of FY24, given the sale of dollars from reserves and the government's borrowing from commercial banks, nearly Tk67,000 crore flowed into the central bank from the country's money supply.

Banks are also considering treasury bills and bonds as a comparatively profitable investment compared to lending to the private sector. Another reason for this is that the interest rates on these bills and bonds have increased by approximately 200 basis points.

While 91-day treasury bills were sold at 7.45% in the first week of October, the latest auction on 9 October offered a maximum of 9.25% against treasury bills of the same duration, central bank data shows. Interest rates on treasury bills with other durations have also increased.

The effect of increased liquidity stress can be observed by examining the central bank's practices regarding Repo, standing lending facility, liquidity support facility, and Islamic banks' liquidity facility. In the past week, the central bank has been providing commercial banks with an average of Tk14,000-18,000 crore daily. Last month, this amount was below Tk10,000 crore. When banks experience liquidity stress, the central bank often extends short-term loans to them.

Additionally, due to increased liquidity stress in banks, the interest rate for overnight lending from one commercial bank to another, known as the call money rate, has significantly risen. As of 18 October, it reached a decade-high of 7.72%. At the beginning of October, it was hovering at around 6.50%.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard one of the reasons for the liquidity stress in the banks is that the central bank is pursuing a contractionary monetary policy to control inflation. However, considering the current situation, he emphasised that controlling inflation should be the primary focus.

Some senior bankers told TBS that all banks are not currently experiencing liquidity stress. Good banks, those with substantial deposits, have not faced liquidity stress yet, they said. However, the banks in a weaker financial position are feeling the stress more, and this is affecting even the better banks.