Excess liquidity Tk2 lakh cr again but banks have little in hand
Excess liquidity in the country’s banking sector crossed the Tk2 lakh crore mark again in June after three months as banks invested more in government bonds instead of lending to the private sector, in line with the tight policy of the Bangladesh Bank to control inflation.
The latest data from Bangladesh Bank showed that the amount of excess liquidity in banks had risen to Tk 203,435 crore at the end of June 2022.
Excess liquidity in the banking sector had remained above Tk2 lakh crore since April 2021 and hit a record high of Tk2.31 lakh crore in August last year amid pumping of money by the bank central via the Covid-19 recovery plan. But the figure fell below Tk2 lakh crore in March this year amid severe dollar shortages at banks.
The shortage of dollars forced the banks to buy the greenback from the central bank in exchange for the local currency.
Excess liquidity is calculated after maintaining the statutory liquidity ratio (SLR) and the required cash reserve ratio (CRR).
It is mandatory for banks to maintain 4% CRR of total cash deposits and 13% SLR in non-cash form with Bangladesh Bank.
The excess amount, however, remains invested in government bonds through which the government borrows money from the banking system.
The yield on long-term government bonds crossed 8% in August this year, from below 4% a year ago, prompting banks to invest in covered bonds instead of lending to risky books.
In addition, banks are forced to invest their excess cash in treasury bills and government bonds to meet the high borrowing target of Tk 1.06 lakh crore set in the new budget for the current financial year. .
Despite excess liquidity, the overnight interest rate has remained on the rise because banks cannot immediately liquidate their bond investments. As a result, banks are borrowing from the overnight money market amid a liquidity crunch caused by the dollar crisis.
The overnight money rate climbed to 7% this month, while it was between 1% and 2% at the start of the year.
Contacted, a senior executive of a private commercial bank said that although the excess liquidity is high, in reality it is not efficient because the amount remains invested in long-term bonds which cannot be liquidated. immediately.
He said banks are now interested in investing in bonds because the Bangladesh Bank is discouraging lending amid rising inflation.
Moreover, the high rate of return prompted banks to invest in government bonds, thereby increasing excess liquidity, he said.
He said that although banks are now well positioned in terms of liquidity, they could face a crisis because the secondary bond market is not developed to sell bonds to make their excess liquidity usable.
Banks maintained an SLR of 24% in June against an 11% requirement, which meant that the excess amount remained invested in bonds, which resulted in excess liquidity, according to the Bank of the Bangladesh.
When banks buy dollars from the central bank, the local currency goes into the Bangladesh Bank vault, which reduces the liquidity of the banking system.
Bangladesh Bank mopped up Tk 10,600 crore in July this year by selling dollars to banks. In the first week of this month, the central bank sold dollars for Tk 12,700 crore to the banks causing a liquidity crunch in the banking system.
On the other hand, the soaring price of the dollar and high imports fueled inflation, prompting the Bangladesh Bank to tighten monetary flows in its new monetary policy announced in June for the current financial year.
In June, the inflation rate hit 7.56% – a nine-year high – in a volatile international market triggered by the Russian-Ukrainian war.
As part of tighter monetary flows, the private sector credit growth ceiling was reduced to 14.1% for FY23 from 14.8% set for the previous year.
The banking sector saw a sharp increase in the flow of credit to the private sector in June, supported by high import costs amid rising dollar prices.
Credit growth reached 13.66% in the month, the highest in 43 months. The rate was 12.94% in May. The rate of bank credit growth in June was close to the monetary ceiling of 14.1% set for the current fiscal year.