Excess liquidity in banks drops Tk10,000cr

Infographics: TBS

Excess liquidity in banks decreased by approximately Tk10,000 crore in September compared to August because of Bangladesh Bank's contractionary policy stance to curb inflation.

Bankers say a large part of access liquidity is not in the hands of banks. Banks have invested a portion of this money to buy treasury bills and bonds to lend to the government. Presently, the interest on bills and bonds has increased to around 10.60%, which has increased banks' willingness to lend to the government.

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 Tk1.64 lakh crore at the end of September from Tk1.74 lakh crore a month ago. The decreasing trend in excess liquidity is likely to continue even in October, BB officials say.

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.

Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB) told The Business Standard, "We currently have a fairly healthy level of excess liquidity, although it has decreased slightly in recent months. There is no need to be concerned about this. If money is left uninvested, it will not generate any returns. As a result, the portion of excess liquidity that banks have invested in various ways is also beneficial to the economy."

Despite having excess liquidity, the call money rate remained upward as banks cannot liquidate their bond investment immediately. As a result, banks are borrowing from the call money market amid a liquidity crunch caused by the dollar crisis.

The call money rate crossed 8% this month. At the beginning of October, it was hovering at around 6.50%.

The central bank is now selling an average of $80 million daily from its reserves. As a result, an average of Tk900 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, nearly $5 billion was sold from reserves to state-owned banks in the first four months of the current fiscal 2023-24. In other words, the sale of these dollars from the market has led to approximately Tk55,000 crore flowing into the central bank. This has caused banks to experience liquidity stress.

According to central bank data, between July and October, the government borrowed Tk31,727 crore through treasury bills and bonds from banks and paid back Tk32,075 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 four months of FY24, given the sale of dollars from reserves and the government's borrowing from commercial banks, nearly Tk80,000 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 275 basis points.

While 91-day treasury bills were sold at 7.45% in the first week of October, the latest auction on 19 November offered a maximum of 10.20% against treasury bills of the same duration, central bank data shows. Interest rates on treasury bills with other durations have also increased up to 10.60%.

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. The central bank is now giving Tk16,000-18,000 crore of this type of short-term loans to commercial banks every day.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard that banks are now under some liquidity stress. "However, the stress is somewhat under control due to the central bank increasing the amount of lending using various tools, including Repo. But if the central bank reduces or stops providing support, we may encounter problems."