Shawdesh desk:

The amount of cash held outside the country’s banks increased for the seventh consecutive month in May amid low confidence of depositors in the banking sector and high inflationary pressures.

According to Bangladesh Bank data, the volume of the currency outside bank reached Tk 2,70,658 crore in May, increasing from Tk 2,64,349 crore in April and Tk 2,61,195 crore in March.

This marked a rise from Tk 2,57,574 crore in February 2024, Tk 2,57,295 crore in January 2024, Tk 2,54,860 crore in December 2023, Tk 2,48,441 crore in November 2023 and Tk 2,45,943 crore in October 2023.

Bankers said that rising living costs had led people to keep more money in hand.

According to Bangladesh Bureau of Statistics data, the overall inflation hit 9.72 per cent in June.  Inflation has remained near 10 per cent since March 2023.

The persistent inflationary pressures have eroded the purchasing power of the currency, prompting depositors to withdraw their funds to hedge against the rising costs of living, bankers said.

Bankers said that despite high deposit rates, many people were still hesitant to keep their money in banks, with some arguing that the deposit rates were not rising at the expected level.

Deposits in banks rose slightly to Tk 17 lakh crore in May from Tk 16.81 lakh crore in April and Tk 16.53 lakh crore in December.

The liquidity crisis has deepened as banks have not received deposits at the desired level due to persistent inflation, bankers said.

Many high-net-worth individuals have diverted their deposits from banks to invest in government treasury bills, which offer high interest rates, they said.

Proposed bank mergers under the central bank’s prompt corrective action framework issued on December 5, 2023 further fuelled panic among depositors, they said.

Trust in the banking sector has also been eroded by loan irregularities and scandals in several banks, bankers said.

The total deposits in the Islamic banking system plunged by Tk 3,938 crore to Tk 4,39,465 crore

at the end of March 2024 compared with that at the end of December 2023.

Excess liquidity in Islamic banks nosedived to Tk 1,518 crore in March 2024 compared with that of Tk 6,643 crore in December 2023.

Due to the high volume of cash outside banks, the financial sector has been struggling with severe liquidity shortage, which compelled the banks to rely on borrowing from the central bank to maintain operations, bankers said.

When cash is held outside banks, it reduces the effectiveness of the central bank’s efforts to control money supply, which is crucial to managing inflation and economic stability, they said.