Excess liquidity in the country's banking sector crossed the Tk2 lakh crore mark again this June after three months as banks are investing more in government bonds instead of lending to the private sector in line with the contractionary policy stance of the Bangladesh Bank to tame inflation.
The latest Bangladesh Bank data showed that the amount of excess liquidity in banks rose to Tk203,435 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 the pumping of money by the central bank through the Covid-19 stimulus package. But the figure dropped below Tk2 lakh crore in March this year amid severe dollar shortages in banks.
The dollar shortage forced banks to buy the greenback from the central bank in exchange for the local currency.
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.
The yield rate of long-term government bonds crossed 8% in August this year which was less than 4% a year ago, prompting banks to invest in secured bonds instead of lending to risky books.
Moreover, banks are being forced to invest their excess liquidity in government treasury bills and bonds to meet the high borrowing target of Tk1.06 lakh crore set in the new budget for the current fiscal year.
Despite having excess liquidity, the call money rate remained upward as banks cannot liquid 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 went up to 7% this month, which was between 1% and 2% at the beginning of the year.
When contacted, a top executive of a private commercial bank said even though excess liquidity is high, in reality, it is not effective because the amount remained invested in long-term bonds which cannot be liquid immediately.
He said the banks are now interested in investing in bonds because the Bangladesh Bank discourages lending amid rising inflation.
Moreover, the high yield rate prompted banks to invest in government bonds pushing up excess liquidity, he said.
He said although banks are now well-positioned in terms of liquidity, they may face a crisis because the secondary bond market is not developed to sell bonds to make their excess liquidity usable.
Banks maintained 24% SLR in June against a requirement of 11% which means the excess amount remained invested in the form of bonds which reflected in excess liquidity, according to the Bangladesh Bank.
When banks buy dollars from the central bank, the local currency goes to the Bangladesh Bank vault, shrinking liquidity in the banking system.
The Bangladesh Bank mopped up Tk10,600 crore in July this year by selling dollars to banks. In the first week of this month, the central bank sold dollars for Tk12,700 crore to banks, causing a liquidity crunch in the banking system.
On the other hand, the soaring dollar price and high imports have fueled inflation, prompting the Bangladesh Bank to tighten money flow in its new monetary policy announced in June for the current fiscal year.
In June, the inflation rate reached 7.56% – a nine-year high – amid a volatile international market triggered by the Russia-Ukraine war.
As part of tightening money flow, the private sector credit growth ceiling was cut to 14.1% for FY23 from 14.8% set for the previous fiscal.
The banking sector saw a big jump in credit flow to the private sector in June, backed by high import costs amid rising dollar prices.
The credit growth hit 13.66% in the month – the highest in the last 43 months. The rate was 12.94% in May. June's bank credit growth rate was close to the monetary ceiling of 14.1% set for the current fiscal year.