What does it indicate if deposit growth in banking sector slows down

A recent news article published in a national daily cited statistic from the Bangladesh Bank, indicating a decrease in deposit growth in the banking sector. Despite an increase in interest rates on deposits, depositors are now less inclined to keep their savings in banks as they used to.

In March, there was a single-digit growth in deposits in the banking sector. During this time, deposit growth stood at 9.99 percent, the lowest level of growth in the past five months. Alongside the decline in deposit growth, people have been withdrawing their savings from banks. In March alone, depositors withdrew more than 3 thousand crore taka from banks.

In the past five months, depositors have withdrawn 15 thousand crore taka from the banking system. Some banks are offering interest rates ranging from 9 to 12 percent on deposits, but even then, it is not possible to increase deposits to the expected level. At the end of March, the total amount of deposits in the banking sector stood at 16 lakh 75 thousand 492 crore taka. During the same period last year, the total amount of deposits stood at 15 lakh 23 thousand 296 crore taka. Therefore, in the span of one year, the banking sector has witnessed an increase in deposits by 1 lakh 52 thousand 196 crore taka or 9.99 percent.

Economists and experts in the banking sector have raised concerns about the sluggish growth in deposits. They assert that achieving satisfactory growth in deposit retention within the banking sector may not be feasible. This is seen as a clear indication of distress within the banking sector. Banking is not like other typical businesses.

Banking businesses are operated based on the deposits of depositors. Therefore, if for any reason, ordinary customers lose faith in the banking system, they tend to withdraw their deposits. Consequently, they withdraw their trust in depositing money into banks. The primary capital in banking business is the unconditional trust and confidence of customers and depositors. If for any reason, the trust of ordinary depositors in the bank is lost, the entire banking system can collapse. Many economists believe that there is an increasing preference among the general public to save money at home rather than depositing it in banks. This is considered one of the significant reasons for the sluggish growth in deposits in the banking sector.

Those who have surplus money tend to deposit it in banks as it is considered natural. This is because banks symbolize security and trust. However, if that trust is shattered, they will certainly lose interest in depositing their surplus money in banks. Some individuals are willing to deposit their savings in banks even if they receive minimal interest. For example, those retired employees keep their retired benefits in the bank instead of keeping them with themselves. Furthermore, any relative or friend can ask them to borrow money. In order to be safe from that situation, they keep the money in the bank instead of keeping it with themselves.

The pace of deposit retention in the banking sector may not appear significant at first glance, but there are various underlying reasons behind it. Some of the shortsighted policies of Bangladesh Bank have contributed to the decline in deposit retention. For instance, in the name of increasing individual investments, since April 2020, the maximum interest rate on bank loans has been capped at 9%. At the same time, the maximum interest rate on deposits has been set at 5% for nationalized banks and 6% for private banks. This highlights a particular aspect of the enacted regulations. In the case of nationalized banks, the maximum interest rate on deposits has been set at 5%, while it was 6% for private banks. This differential treatment is aimed at providing unfair advantages to privately owned banks in deposit collection. Additionally, for the same individual, the deposit retention rate in nationalized institutions is set at 50%.

Previously, state-owned institutions could deposite 25% of their surplus funds in privately owned banks. Setting the maximum interest rate on bank loans at 9% and the maximum interest rate on deposits at 6% was an arbitrary decision. As a result of this decision, the banking sector has suffered losses.

State-owned institutions have suffered adverse consequences by depositing their profits in privately owned banks. With the interest rate on bank loans set at 9%, borrowing from banks becomes comparatively cheaper. Many influential individuals take advantage of this situation by taking out substantial loans from banks and diverting them to accounts other than the designated ones. As a result, the flow of money in the market increases beyond the expected level.

After the start of the Ukraine war in the United States, inflation surged to 9.1%. To address this situation, the Federal Reserve Bank of America (the Fed) increased the policy rate (the interest rate at which central banks lend to scheduled banks during the borrowing period). As a result, interest rates on bank loans increase proportionally.

After raising the policy rate, the Federal Reserve Bank of America also takes additional measures to control high inflation. However, despite the frequent increases in the policy rate by the Bangladesh Bank, it maintains the maximum interest rate on bank loans (the interest charged to entrepreneurs by banks during the lending period) at 9 percent. Currently, the policy rate of the Bangladesh Bank is reduced to 8 percent from the previous 5 percent.

Many allege that the Bangladesh Bank took this step to protect the interests of a certain influential group. The maximum interest rate on bank loans had been fixed at 9 percent until a few days ago. As a result, the trend of high inflation continues. Due to the determination of the maximum interest rate on deposits at 6 percent, depositors have lost interest in keeping their surplus funds in banks. Because at that time the interest rate on deposits was much lower compared to the prevailing high inflation. Many argue that people are increasingly inclined to save cash. Therefore, they are not depositing money in banks. This statement is not acceptable in any way. Unnecessarily, no one saves money at home.

Due to high inflation, both the purchasing power and economic capability of ordinary people have decreased. Because of this, they are not finding any opportunity for savings. They are utilizing the deposited money in banks for managing household expenses as there are no alternative ways for expenditure management. Let's consider an example. Suppose a person's monthly salary is 100,000 taka, and the annual increment rate is 5%. At the end of the year, their salary will be 105,000 taka. However, at the same time, inflation has increased by 10%. So how will he cover the gap of 5 thousand Taka between his income and expenses?

If someone has savings in a bank, they will try to withdraw from it to meet their needs. The natural income of a person is increasing, but the amount of expenses is increasing much more than that. As a result, it is difficult for them to think about saving after managing household expenses. In other words, due to the lack of capacity, people are unable to save money as they did before.

The primary reason behind the decrease in deposits is the erosion of trust and confidence in the banking sector among the general public. In recent times, there have been significant incidents of irregularities in the banking sector, but none of these have been properly adjudicated.

A few months ago, the owners of an Islamic bank, under the guise of anonymity, illegally took out 30 billion taka in loans and smuggled it abroad. After this incident was exposed, many people withdrew their deposits from the bank. A responsible government official mentioned at an event that due to rumors, customers have withdrawn 50 thousand crore taka from the banking sector. We do not know how much of this 50 thousand crore taka has been returned to the banks. There has been no legal action against the banks from which the entrepreneurs have taken money. Instead, judicial proceedings have been halted in various ways.

The initiative taken by the Bangladesh Bank to merge weaker banks with stronger ones has significantly eroded the trust and confidence of the general public in the banking sector. Many believe that this initiative has been undertaken not with the correct planning but rather to appease certain individuals. Bangladesh Bank claims that these banks are merging voluntarily. However, this assertion is not being directly substantiated. Moreover, there is doubt whether this is a merger or a takeover. Some banks have already indicated that they are not willing to merge with any other bank under any circumstances. Another bank has already appointed a new management board at the initial stage of its merger process. It's being heard that this bank will not undergo a merger. Then why isn't the same step being taken for others? The process of bank mergers has created a kind of turmoil in the entire banking sector. In such a situation, depositors are unlikely to initiate any new efforts to preserve deposits in identified weak banks. Instead, they may try to withdraw the deposits they already have in those banks.

The presence of accumulated defaulted loans in the banking sector is considered the biggest reason behind the increase in the interest rates on banking loans. Bangladesh Bank has taken various initiatives to recover delinquent loans, including efforts to identify defaulters for the first time. However, many are expressing doubts about these initiatives of the Bangladesh Bank. Is Bangladesh Bank really interested in recovering defaulted loans, or are they taking such steps to please someone? Self-contradiction is being witnessed in the activities of Bangladesh Bank. Bangladesh Bank has taken a strict stance in recovering defaulted loans. But in reality, they themselves are paving the way for the creation of new defaulted loans.

Previously, the rule was that if one project of an industrial group defaulted on a loan, the remaining projects would be considered ineligible for bank loans. Recently, Bangladesh Bank has issued a circular stating that even if one project of an industrial group defaults on a loan, there will be no hindrance for the bank to receive loans for the remaining projects. Can the Bangladesh Bank authorities say whether the amount of defaulted loans will decrease or increase? The previous rule had the opportunity to put pressure on the owners of industrial groups, now it has been withdrawn. Given the direction in which the banking sector is heading from all perspectives, we need to wait to see what consequences will occur in this sector in the future.

M A Khalek: Retired General Manager of Bangladesh Development Bank PLC and an economic affairs writer.