Taka returning to banking system as deposit interest rises

Infographic: TBS

Due to an increase in deposit interest rates and sluggishness in investments before the upcoming national elections, approximately Tk33,000 crore has returned to the banking system in the first two months of the current fiscal year from individual holdings.

According to data from the Bangladesh Bank, currency held by individuals outside of banks amounted to Tk2.91 lakh at the end of June this year. However, by the end of August, this figure had decreased to Tk2.58 lakh.

Bankers said people had previously preferred holding cash due to eroded confidence in the banking sector, attributed to loan irregularities and high inflation.

In July, the central bank removed interest rate caps on deposits and lending. Many banks subsequently raised their deposit rates, resulting in increased deposits and the easing of banks' liquidity crises.

A managing director of a private bank told The Business Standard that private sector investment has been declining drastically for the past few months.

"One of the reasons for this is higher production costs due to reduced export demand. If the cost of production increases, the money in individuals' hands also increases. Because you have to keep extra money to buy things and pay employees," he added.

"People are now depositing their money in banks due to the rising costs of flat and plot registrations and concerns about the security risks of keeping money at home."

He also mentioned that approximately Tk36,000 crore went out of the banking system suddenly in June during Eid-ul-Azha celebrations. During that period, businessmen chose to keep the proceeds from the sale of sacrificial animals at home.

In August, private sector credit growth hit a 22-month low at 9.75%. This marked the ninth consecutive month of decreasing credit growth. In August last year, it stood at 14.07%.

Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), explained to TBS that the negative private sector credit growth is a consequence of the global economic slowdown, resulting in increased inflation both domestically and internationally.

"This, in turn, has led to higher interest rates by banks, causing businesses to reduce their borrowing."

"The upcoming election is a significant concern. Businessmen are hesitant to make major investments before elections. Additionally, global demand remains weak, with imports decreasing by nearly 20% as garment shipments fell. As a result, private credit flow did not increase," he added.

Deposits on the increase 

At the end of August this year, the amount of deposits in the banking system stood at Tk16.18 lakh crore, compared to Tk16.07 lakh crore in the previous month.

Besides, at the end of June, the deposits were Tk15.95 lakh crore, compared to Tk15.64 lakh crore in the previous month.

According to central bank data, deposit growth in the banking sector was 8.40% year-on-year in June, but it increased to 9.67% in July and further to 10.18% in August.

Treasury officials at several banks have said deposits are expected to continue increasing as interest rates are on the rise. As the election approaches, investments are likely to decrease, leading to a return of cash to banks.

By reviewing the websites of some banks, it becomes evident that in August, banks were offering deposit rates as high as Tk7-8.50, whereas this rate had been capped at 6% until June.