How banks' cash excess liquidity drops by Tk15,000cr in just one month

Cash excess liquidity in the banking sector came down to Tk5,156 crore at the end of January from an unusual jump to nearly Tk20,000 crore in December due to cash injection to Islamic banks.

Banks are required to maintain a cash reserve ratio (CRR) of 4% with the central bank against customer deposits. If banks have more than this requirement, it is considered as cash excess liquidity.

According to Bangladesh Bank data, banks' cash excess liquidity over the past year has fluctuated around Tk5,000-10,000 crore. Suddenly, at the end of December, it increased to Tk19,966 crore.

According to bankers, several Islamic banks have been facing a CRR shortfall for the past year. Some of them also had a deficit in their current accounts with the central bank, they said.

"In order to maintain their balance sheets at the end of December 2023, the central bank provided liquidity support to these banks on a special consideration basis, which resulted in the banks having cash excess liquidity for a temporary period," a Bangladesh Bank official told TBS.

As of the end of January 2024, foreign banks have the highest amount of cash excess liquidity, with Tk2,118 crore while private banks have Tk1,495 crore, state-owned banks have Tk925 crore, and shariah-based banks have only Tk593 crore.

Central bank officials said five shariah-based banks have a CRR shortfall of around Tk10,000 crore.

Bangladesh Bank data shows the amount of cash excess liquidity was Tk7,821 crore at the end of August 2023. It was Tk5,429 crore in November of the same year.

The central bank provided Tk22,000 crore in emergency funds to seven banks, including five Islamic banks in crisis, to improve their balance sheets at the end of last year.

On 28 December, Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Global Islami Bank, Union Bank, Padma Bank and National Bank took the money for three days at an interest rate of 9.7%.

The central bank provides the money against "Demand Promissory Notes" as the banks did not have any securities to give as collateral.

The managing director of a private bank told TBS, "We ended 2022 with a foreign currency crisis. In 2023, banks faced a crisis of both foreign currency and local currency. Banks still have a liquidity crisis, which is why cash excess liquidity is not increasing that much."

He said that several Islamic banks still have a CRR shortfall of more than Tk10,000 crore, which is why they are being fined every day. "They were in the same situation last year, and at the end of the year, the central bank provided them with liquidity facilities at special rates to make their balance sheets look good."

The senior banker went on to say, "As a result, they were able to make their balance sheets look good, but the liquidity facilities they were given were withdrawn after three days."

Banks' excess liquidity falls by Tk11,000cr in January

The excess liquidity in the banking sector dropped by Tk11,000cr to Tk1,52,000 crore in January compared to the previous month.

According to Bangladesh Bank data, the amount of excess liquidity in banks was Tk1,63,000 crore in December last year.

The excess liquidity is calculated after maintaining the required statutory liquidity ratio (SLR) and 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.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS, "Businesses are not repaying their loans. Many businesses are converting working capital loans into term loans. This is not creating liquidity inflow for the banks."

In addition, businesses' production has been hampered by the sharp decline in imports, he said, adding that this has led some small businesses to fall out of business.

"At the same time, inflation is now close to 10%, which is why people are not saving more money in banks. This is because people are spending most of their income on meeting their daily needs," said the Mutual Trust Bank MD.