Banks with surplus funds in Bangladesh are increasingly preferring government securities to lending to the private sector as the former gives higher yields amid the continued interest rate cap.
Excess liquidity totalled Tk 189,910 crore in July, down 7 per cent a month before and 15 per cent year-on-year, data from the Bangladesh Bank showed.
However, 62 per cent of the excess fund was concentrated in only nine banks.
Excess liquidity held by banks means the country’s private sector is not getting adequate loans, experts say. This is because the banks that sit on surplus funds usually invest them in the bills and bonds issued by the government.
The nine banks that are enjoying surplus liquidity are Sonali Bank, Standard Chartered, Janata Bank, Islami Bank Bangladesh Ltd, Agrani, Rupali, Pubali, Bank Asia, and Dutch-Bangla Bank Ltd.
Some of them are now turning to Treasury bills and bonds because of a reasonable yield compared to the interest rate on loans going to the private sector.
A bank receives up to 8.65 per cent on their investment in government securities whereas they can earn a maximum of 9 per cent on the loans owing to the interest rate ceiling, which has been in place since April 2020.
In addition, there is no requirement for keeping provisions against their investment in government securities.
On the contrary, banks have to earmark 0.50 per cent to 5 per cent of their operating profits against general category loans, 20 per cent against classified loans of substandard category, and 50 per cent against classified loans of doubtful category.
Besides, if banks invest in Treasury bills and bonds, there is no default risk whereas loans carry the risk of turning sour.
There are nine types of bills and bonds in Bangladesh, with the tenure ranging from 91 days to 20 years. The interest rates on the instruments are between 6.04 per cent and 8.65 per cent.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, however, says the existing excess liquidity does not paint the real scenario in the banking sector as many banks now face a shortage of cash.
Some banks are taking funds from the call money market, a platform where lenders receive short-term loans from each other, to meet their day-to-day demand for cash, he said.
“Some banks are less motivated to disburse loans to the private sector due to the higher yield provided by government securities.”
Salehuddin Ahmed, a former BB governor, thinks that excessive investment in government instruments is not a good sign for the economy since the productive sector does not get adequate funds to run its operations and expand.
“Banks always try to manage good profits from their investment. But the central bank should monitor the issue properly in the best interest of the economy,” he said.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, urged the central bank to lift the interest rate cap and allow the market to determine the rate.
“If there is no interest rate ceiling, banks may avoid investing in government tools,” she said.
Mohammad Ali, additional managing director of Pubali Bank, says his bank has disbursed loans as well as invested in treasury bonds to secure a better return.
The private commercial bank lent Tk 10,000 crore to the private sector in the last one year. Likewise, it has invested a sizeable amount in government securities.
“If funds are invested in government instruments, banks can manage a good return,” Ali said.
The excess liquidity in Pubali Bank stood at Tk 9,100 crore in July.
Ali said since there is liquidity stress in the market, a good number of banks are unable to provide required funds to the government by purchasing the bills and bonds.
“So, the interest rates on the treasury bills and bonds are on the rise. Now is the best time to invest surplus funds in government instruments.”
Shah Md Ahsan Habib, a professor of the Bangladesh Institute of Bank Management, however, does not think that there is any major liquidity stress in the banking sector.
“It is a common phenomenon that some banks enjoy better liquidity position while others struggle. This is why cash-strapped banks approach the call money market to meet their immediate liquidity requirement,” he said.
The banking sector had a large amount of excess liquidity at the height of the coronavirus pandemic as the opportunity for making investments was squeezed to a large extent owing to business slowdown.
The lower demand for funds sent the excess liquidity to Tk 231,711 crore in July last year.
The amount of surplus liquidity began falling after the country’s import payments escalated due to the global supply chain obstacles, along with the pent-up demand as the economy recovered from the pandemic-induced slowdown.
The blistering import payments created an acute dollar shortage, compelling the central bank to inject the American greenback into banks in exchange for the taka.
The BB supplied a record $7.62 billion to the market in the fiscal year of 2021-22 and more than $3 billion this fiscal year so far.
Since banks have purchased the dollar in exchange for the local currency, it has created the liquidity shortage as well.
The taka lost its value by at least 25 per cent against the US dollar in the last one year.