Bangladesh’s banking sector is grappling with a severe crisis as deposit growth has plunged despite record-high interest rates of 12-13% on fixed deposits.
Data from Bangladesh Bank reveals that in the first six months of the 2024-25 fiscal year (July-December), total deposits grew by Tk34,517 crore— a stark decline of nearly 42% compared to the Tk59,033 crore increase in the same period of the previous fiscal year.
In an attempt to stabilise struggling banks, Bangladesh Bank has extended Tk28,000 crore in loans to nine private banks by printing new money, alongside an additional Tk7,350 crore under its guarantee scheme.
However, experts note that the total deposit growth in the sector remains lower than the liquidity support extended to these weaker banks.
Furthermore, a significant portion of the central bank’s injected funds has already been withdrawn by depositors, reflecting the persistent lack of confidence in the banking system.
Bank executives assert that trust is the cornerstone of banking, ensuring that depositors feel secure in withdrawing funds whenever needed.
However, in the aftermath of the recent mass uprising, nearly a dozen banks failed to return depositors’ funds, exacerbating the public’s distrust.
Industry insiders warn that unless confidence is restored, a majority of banks may soon face an existential crisis.
Mutual Trust Bank Managing Director and CEO Syed Mahbubur Rahman underscored the gravity of the situation, stating: "A severe trust deficit has led to a substantial outflow of funds from banks. Additionally, high inflation has eroded disposable income, leaving salaried middle-class individuals with little to save at the end of the month. As a result, deposit inflows have weakened significantly."
He emphasised that rebuilding trust must be the primary focus to revive deposit growth, alongside improvements in corporate governance, political stability, and law enforcement.
Without these measures, economic activities will remain sluggish, impeding new investments and job creation.
Bangladesh Bank data further highlights the sharp deceleration in deposit growth.
At the end of June 2023, total bank deposits stood at Tk15.95 lakh crore, with an annual growth rate of 8.40%.
By December 2023, deposits rose to Tk16.54 lakh crore, with growth slowing to 3.70%. A brief uptick was observed in June 2024, when deposits reached Tk17.42 lakh crore, with growth recovering to 9.25%.
However, by December 2024, deposit growth had plummeted to a mere 1.98%, with the total standing at Tk17.77 lakh crore.
The roots of the crisis can be traced back to 2020 when, under pressure from businesses, the central bank capped lending rates at 9%.
This prompted leading banks to slash fixed deposit rates to as low as 2-3%.
Yet, even then, deposit growth exceeded 10%.
However, in response to inflationary pressures and recommendations from the International Monetary Fund (IMF), the interest rate cap was removed at the start of the 2023-24 fiscal year, leading to a steady rise in lending rates, which now hover at 16-17% in most banks.
Consequently, deposit rates have climbed to 12-13%, with weaker fourth-generation banks offering even higher rates to attract funds.
Despite the increase in deposit rates, inflation-adjusted returns remain negligible.
Many bankers also pointed out the detrimental impact of widespread negative media coverage on the banking sector.
Stories of depositors being unable to withdraw funds, bank managers fleeing branches, and customer protests have severely shaken public confidence.
Industry experts warn that unless decisive steps are taken to restore faith in the banking sector, the situation may further deteriorate, exacerbating the financial instability plaguing the nation.
