Deposit growth shrinks on election pressure

Despite intense efforts to mobilise funds, the banking sector saw a sharp fall in deposit growth in October amid withdrawal pressure centring the upcoming parliamentary election.

In October, the deposit growth stood at 8.86 percent, in contrast to 10.62 percent at the beginning of the year.

Deposits typically shrink due to cash withdrawal pressure for election expenditure, said Syed Mahbubur Rahman, managing director of Dhaka Bank.

Banks are facing cash crisis again due to cash withdrawal pressure and the government borrowing from the banking system ahead of the election, he said.

“The crisis is temporary,” said Faruq Mainuddin Ahmed, managing director of Trust Bank.

The interest rate on deposits have crept up to 9-10 percent in recent months as banks desperately look for funds to adjust their balance sheet at the end of the year, according to Rahman.

The fall in deposits has been widening the mismatch between deposit and credit growth, putting the banks at risk, said market insiders.

In October, the private sector credit growth was 14.7 percent, which is far higher than the deposit growth.

The mismatch has been mopping up excess liquidity.

Excess liquidity, which increased significantly in June thanks to reduction of cash reserve requirement, fell to Tk 81,000 crore in September from Tk 97,500 crore in June, according to data from the Bangladesh Bank.

On April 4, the central bank reduced the CRR by one percentage point to 5.5 percent.

On June 20, the Bangladesh Association of Banks, a platform of directors of the private banks, announced slashing of interest rate on deposits to 6 percent and lending to 9 percent from July 1.

The move was to stop unhealthy competition in collecting deposits and bring down the borrowing rate.

Most of the banks did not follow the interest rate fixed by the association due to a fund crisis, said a senior executive of a private bank.

Depositors are more interested in investing in savings instruments due to their high interest rate instead of parking money with banks, he said.

The government is paying 11.52 percent interest against savings certificates, whereas bank deposits fetch, at most, 10 percent.

Total deposits stood at Tk 10.63 lakh crore at the end of October.