The opportunity for the banks to gain higher returns by investing in government securities such as treasury bills and bonds has decreased massively in the recent months.
The banks are now facing a situation at a time when they are struggling with big amounts of surplus liquidity along with poor credit disbursement to the private sector since the COVID-19 outbreak, which has shown little to no signs of improvement.
A Bangladesh Bank official has stated that the rapid upturn of coronavirus cases in March, a major question has emerged of whether the banks, which are expecting increase in the private sector credit growth, would be able to use the idle money effectively.
Because of the government’s slow spending on the Annual Development Program and people’s increased appetite for investment in national savings certificates, the government has taken steps to lower the borrowings against treasury bills and bonds in the last several months, stated by the official.
In line with the Bangladesh Bank data, return against 20-year treasury bonds was 9.2 per cent in May 2020, which is higher than the 9 per cent cap fixed by the government for the banks to issue credit to its customers. The rate has inched down to 8.94 per cent in June 2020.
In stark contrast, in January, February and March 2021, the central bank held an auction for the 20-year treasury bonds where the return rate was 6.98 per cent, around 2 percentage points lower than the return in 2020. In the lone auction for the 15-year treasury bond held in the first three months of the year 2021, the banks received 6.69 per cent interest while the return rate was around 9 per cent during the same period in 2020.
Interest on other treasury bills and bonds — seven-day BB Bill, 14day BB Bill and 30-day BB Bill, 91-day, 182-day and 364-day TBills, and two-year, five-year, 10-year treasury bonds — has also dropped significantly in the last one year, BB data showed. Interest on the 91-day treasury bill dropped to 0.58 per cent in March 2021 from 7.14 per cent a 2020.
The banks’ chances for increasing their earnings through investment in treasury bills and bonds has been crippled as the government’s borrowing through the national savings certificate has been on the rise from the very beginning of the fiscal year of 2020-21.
In the July-January period of FY21, net sales of national savings certificates reached Tk 25,702.17 crore against the government’s budgetary target of Tk 20,000 crore set for net sales for the fiscal. The heavy NSCs sales also allowed the government to repay its bank debt.
The government’s outstanding bank borrowing dropped by Tk 11,940.23 crore to Tk 1,65,882.78 crore at the end of February 28, 2021, from Tk 1,77,823.01 crore at the end of June 2020. In the period, the government borrowed Tk 31,093 crore from scheduled banks against its repayment of Tk 43,033.75 crore to the central bank.
Even after the payment, the government had around Tk 27,000 crore in its accounts as deposit at the end of February while its bank deposit stood at Tk 33 crore at the end of fiscal year of 2020.
In the fiscal year of 2020, the government borrowed Tk 80,238 crore from the banking sector.
The declining investments scope has prompted many of the banks to set rates for deposits at a discouraging level for the depositors.
For instance, Eastern Bank, one of the prominent banks in the country, is now offering 2 per cent interest against savings accounts and short-term deposits, and 3 per cent against fixed deposits, as per the data available at an EBL branch.
Besides, many of the banks have halted selling some of their high-return deposit products to the customers with a view to bringing down costs and avoiding the burden of additional liquidity.
Bankers said that the overwhelming amount of idle funds in the banks along with falling interest rates on treasury bills and bonds may affect the banks’ profitability.