Inflation drains Tk50,000cr from bank savings

Highlights: 

• Overall deposit declined by Tk50,000 crore in July-April
• Excess liquidity shrank by Tk13,300 crore in the span of month in April

Surging inflation has caused savers to suffer a big loss, eating up Tk50,000 crore in savings from banks in the first 10 months of the current fiscal year.

The sharp fall in bank savings has dried up liquidity in the banking system at a time when the government and the private sector need money the most for investments.

In July-April of FY22, the banking sector saw its deposits plummet by 40% to Tk75,535 from Tk126,000 crore in the same time a year ago, according to data from the Bangladesh Bank. 

The drastic fall in term deposits – which refers to saving money for certain periods – reflects that savers are not interested in parking money in banks, prompting the banks to close their savings schemes. 

The Bangladesh Bank in a monetary review report prepared for internal consumption said as real return on deposits is in the negative territory for a while, the deposits become unattractive and thus the deposit growth has continued to fall. 

The widening deposit-credit gap may bring in liquidity pressure on the banking system in the near future. The central bank's intervention in the forex market also contributed significantly in this respect, the report said. 

The term deposit growth fell to 8.6% in April in contrast to nearly 13% in the same month last year.

The overall deposit growth in the banking sector declined to 9% year-on-year in April. 

When deposit growth is falling, credit growth keeps rising putting pressure on liquidity, eventually leading to a sharp decline in excess liquidity. 

The total excess liquidity dropped by Tk13,300 crore in the span of a month in April from Tk1.99 lakh crore in March, according to data from the Bangladesh Bank. 

The tight liquidity has pushed up rates of call money and treasury bills, bonds and others. 

The call money rate, which remained below 3% even at the beginning of this year, crossed the 5% mark in March and has kept rising as banks are borrowing money at call amid shortage of liquidity.  

The yield rate of government treasury bills and bonds shot up to 8%-10% in June, which was below 4% several months ago. These rates have increased at a time when banks do not have enough liquidity to invest in government bills and bonds.

Even though money rates are surging, deposit rates are still below inflation as the revising up of interest rates will eat up banks' profits when lending rate is fixed at 9%.

The country's inflation hit an eight-year high of 7.42% in May when deposit rates in most banks remained below 5% in the last two years since the fixed lending rate came into effect in April 2020.

The gap between inflation and deposit rates is widening, meaning that savers are counting more losses.

As bank deposits are not giving any more returns, saving schemes have vanished with rising inflation. 

Savings, excess liquidity in banks declining, loan demands increasing

For instance, the fourth generation Midland Bank, had 24 saving schemes in 2020, which came down to one last year following the implementation of the fixed lending rate. 

The bank increased its savings schemes to five this year, apprehending tight liquidity in the coming days.

Most banks in the industry closed their savings schemes in the last two years as they were reluctant to take deposits amid ample liquidity when people could not spend their money owing to pandemic-led movement restrictions.

Moreover, banks kept their deposit growth low to cut costs during the fixed lending rate regime, according to market insiders.

Asked, Md Ahsan-uz Zaman, managing director of Midland Bank, said the number of deposit schemes declined in the banking industry as depositors are reluctant to avail savings schemes because of low returns. 

On the other hand, banks were also cutting deposit rates to minimise their costs. 

In the case of Midland Bank, he said they had to compromise on profits to adjust the deposit rate with rising inflation. 

The bank faced de-growth in lending as the consequence of raising the deposit rate as they did not want to continue loans with premium rates below 9%. 

Ahsan-uz Zaman said maintaining deposit growth is now costly for banks. That is why they are taking deposits cautiously, causing low deposit growth.

Nonetheless, the banking sector will face tight liquidity soon because of rising imports and the government's high borrowing target in the new budget. 

So, banks will have to go hunting for deposits again, he added.

Some banks, including his one, have already slightly increased deposit rates, he noted.

Tight liquidity is already visible as money rates surged. The cost of money has gone up but banks could not pass it on to borrowers owing to the fixed lending rate, he added.

Decline in deposits shows that people have less disposable income amid rising inflationary pressure, said Fahmida Khatun, executive director at the Centre for Policy Dialogue.

It is also a warning of squeezing spending and consumption, she also said.

But less spending is not worrying for now as it will help reduce inflationary pressure, Fahmida added. 

The growth of demand deposits with banks, which show disposable income, slowed down to 13% in April, which grew above 20% in 2020 and 2021, contributing to the overall pile-up of bank deposits during the pandemic.

The demand deposits started to fall from the middle of the last year after movement restrictions were lifted and consumers came back to spending on travelling and others. 

The overall savings have fallen down, but the number of millionaire bank accounts kept rising, reflecting that savings are not equally balanced across the society.

The number of millionaire bank accounts increased by 1,621 in the first three months of 2022.

At present, the number of millionaire accounts in the banking sector stands at 103,597, which was 101,976 at the end of December 2021.

With bank savings under pressure, the government proposed historic high borrowing from banks to foot the government's expenditure bill in the next fiscal year.

At a time when credit demand from the private sector has started picking up creating liquidity pressure on the banking sector, the government now wants to increase its bank dependency to source a major portion of deficit financing in the proposed budget for the next fiscal year.

The bank borrowing target was set at Tk1.06 lakh crore for the fiscal year 2022-23, which was 43% of the total deficit amount.