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Latest BB Economic Indicators Data

Banks sitting on massive excess liquidity instead of lending, threatening growth

Published : Thursday, 22 May, 2025 at 12:00 AM  Count : 445
The banking sector is currently sitting on an unprecedented pile of idle cash - far exceeding regulatory requirements - while credit flow to productive sectors continues to shrink. The latest data from Bangladesh Bank in its latest major economic indicators data revealed on Tuesday shows a dangerous imbalance that could strangle economic growth if not corrected immediately.

As of February 2025, scheduled banks held a staggering Tk 5.39 trillion in liquid assets, representing a sharp 14.03 per cent increase from June 2024. More alarmingly, excess liquidity - the amount banks hold above mandatory requirements - ballooned to Tk 2.53 trillion, marking an explosive 29.39 per cent growth in just eight months. These numbers would normally signal a robust financial system, but the reality paints a very different picture.

While banks amass these enormous cash reserves, they have dramatically slowed lending to businesses and consumers. Private sector credit growth plummeted to just 7.57 per cent year-on-year in March 2025, down from 9.84 per cent in June 2024 and 10.49 per cent in March 2024. This isn't a gradual decline - it's a nosedive. And it's happening at the worst possible time, just as the economy needs credit to combat inflationary pressures and stimulate growth.

The banking sector's risk aversion has reached alarming levels. Instead of channeling funds to productive sectors, banks are parking money in low-yield government securities and central bank accounts. The Advance-Deposit Ratio (ADR), which measures how much of deposits are being lent out, remained stagnant at 81.17 per cent in December 2024 compared to 80.38 per cent a year earlier. This paralysis in credit distribution persists despite improving liquidity conditions across the sector.

Deposit trends tell an equally concerning story. Overall deposit growth slowed to 8.51 per cent in March 2025 from 9.98 per cent a year earlier. More troubling is the 0.51 per cent contraction in demand deposits - the money people and businesses can access immediately - suggesting reduced economic activity and possibly even cash hoarding outside the banking system. The only growth came in time deposits (up 9.69 per cent), indicating that depositors themselves are becoming increasingly risk-averse.

A breakdown of liquidity holdings shows private commercial banks (excluding Islamic banks) sitting on the largest cash pile at Tk 2.97 trillion, followed by state-owned banks at Tk1.58 trillion. Islamic banks held Tk365 billion while foreign banks maintained Tk 463.3 billion in liquid assets. These institutions clearly have the capacity to lend - they're simply choosing not to.

While short-term liquidity metrics appear strong - the Liquidity Coverage Ratio (LCR) improved to 157.50 per cent in December 2024 from 147.69 per cent a year earlier - longer-term indicators reveal emerging vulnerabilities. The Net Stable Funding Ratio (NSFR), which measures sustainable funding structures, declined to 105.41 per cent from 108.45 per cent during the same period. This suggests that while banks have ample cash today, their ability to maintain stable funding is gradually eroding.

Bangladesh Bank officials are growing increasingly frustrated with this situation. "Liquidity without lending is a dead asset," warned one senior central banker who spoke on condition of anonymity. "Banks are failing in their fundamental role as financial intermediaries." The central bank has hinted at potential policy interventions if the credit drought continues, possibly including adjustments to reserve requirements or other regulatory measures to force banks to lend.

The consequences of this liquidity hoarding are already becoming apparent. Domestic credit growth fell to 9.19 per cent in March 2025 from 12.14 per cent a year earlier. At a time when businesses need capital to recover from economic shocks and expand operations, banks are effectively locking away funds that could fuel growth, create jobs, and boost productivity.

This crisis of confidence comes at a critical juncture for Bangladesh's economy. Inflation, while moderating slightly, remains a persistent challenge. Businesses across sectors are struggling with higher input costs and reduced consumer spending. The banking sector's reluctance to lend threatens to exacerbate these problems, potentially creating a vicious cycle of economic contraction.

The solution lies in decisive action. Bangladesh Bank must consider stronger measures to incentivize - or if necessary, compel - banks to increase lending. This could include tiered reserve requirements that penalize excessive liquidity hoarding, targeted lending programmes for priority sectors, or even direct intervention in bank lending policies, BB sources say.

Banks, for their part, need to recognize that excessive risk aversion carries its own dangers. By starving the economy of credit, they're ultimately undermining the very system that sustains their business. The current strategy of parking funds in government securities may provide short-term safety, but it's a dead-end for long-term profitability and economic growth.

The numbers don't lie: Bangladesh's banking sector has the money. What it lacks is the vision and courage to put that money to work. Unless this changes soon, the entire economy will pay the price, sources say.



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