How inflation leads to liquidity crunch in banks

Infographic: TBS

Soaring commodity prices have put pressure on bank deposits as people are barely having any money left to park in banks after meeting the increased cost of living, some are even breaking their deposits to have both ends met.

On top of this, banks' increased spending on dollar purchases and an upsurge in credit flows to the private sector are drying up liquidity in the banking system. 

As per the latest available data from the Bangladesh Bank, the total amount of deposits in the country's banking sector dropped 6.8% to Tk13.65 lakh crore in August this year from Tk14.65 lakh crore in the same month a year ago.

The Bangladesh Bank data shows that the banking sector in the country saw its time deposits and demand deposits plummet markedly in recent months, while credit growth has been on an upward trend.

Time deposits are deposited in the bank for a fixed period of time, while in the case of a demand deposit there is no fixed time period involved.

In July this year, the volume of demand deposits was Tk1.75 lakh crore this July, which fell to Tk1.60 lakh crore in the following month.

Bankers have said that people are now preferring keeping cash money in their hands to depositing in banks considering future needs amid ever-increasing inflation, while banks also are not interested in taking deposits at higher interest rates as the central bank has imposed a 9% cap on lending rates.

To cope with the crisis, cash-strapped banks are borrowing more from the central bank.

Banks borrowed over Tk40,000 crore from the central bank through treasury bills and bonds in the July-September quarter this year, which was only around Tk2,000 crore to Tk3,000 crore per month in the same period a year ago.

Besides a surge in borrowing from the central bank, the interbank call money rate also has marked a sharp increase recently.

Untamed inflation

The inflation rate has been rising continuously for the past several months.

The country witnessed a record 9.5% inflation in August this year, the highest in 12 years, due to adverse effects of fuel price hike, but it came down slightly to 9.1% in September, said the Bangladesh Bureau of Statistics (BBS).

In those two months, food inflation spiked to over 10%.

In the first week of August, the prices of petrol, octane, diesel, and other fuel oils increased by 42.5% to 51.6%, the highest in 20 years, causing prices of daily commodities to go up.

Prices of non-food goods and services such as transportation, clothing, and educational materials also started increasing.

All this has affected deposits in the banking sector, said industry insiders.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS that additional dollars are being spent due to an increase in global commodity prices and banks' increased expenditures on dollar purchases have made a dent in their liquidity.  

In the wake of the crisis, banks are borrowing more money from the central bank, he added.

Liquidity in stress

Excess liquidity in the banking sector fell to Tk1.74 lakh crore at the end of this August, which was Tk2.03 lakh crore two months earlier.

Surplus liquidity in banks was more than Tk2.31 lakh crore at the end of August last year.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told TBS that the deposit growth rate was 8% in July this year, while the credit growth was more than 14%. Besides, crores of taka are moving from the market to the central bank through the sale of dollars. Moreover, many people are taking loans easily as lending rates have not been hiked.

All these factors are contributing to a deepening liquidity crisis in banks, he said.

To overcome the crisis, Mansur said, the central bank should stop the sale of dollars now. He also stressed supplying liquidity to banks by any means.

Increased dollar sales by the Bangladesh Bank

According to sources, the central bank is constantly selling dollars due to the low supply of foreign currency in banks. It has sold around $4 billion to various banks so far in the current fiscal year 2022-23, as a result of which about Tk40,000 crore has gone to the central bank from the market.

In addition, against the sale of $7.62 billion in the previous fiscal, about Tk70,000 crore moved to the central bank from the market.

Private credit growth on the rise

Although deposits have declined, private sector credit growth has been on the upside for the past five months owing to rising prices of dollars and commodities.

The central bank in its monetary policy for the current fiscal year has cut the private sector credit growth ceiling to 14.1% from 14.8% for FY22 as part of its efforts to tighten money flow, but private sector credit growth rose to 14.07% in August, the highest in 45 months.

Due to the liquidity crisis in the banking sector, the government is also taking loans from the central bank by reducing borrowing from banks.

At the end of the September quarter of this fiscal year, the government has taken out Tk13,000 in loans from the central bank. And instead of taking loans from the banking sector, the government repaid Tk7,769 crore of the previous loans.