Weak credit demand is pushing Bangladesh’s banking sector into an unusual position: massive excess liquidity. The surplus has climbed to Tk 4.08 trillion, a 39.40 per cent increase from the same time last year, according to the latest data from the central bank. This accumulation occurs because the volume of money flowing into bank accounts is outstripping the volume of money being borrowed by businesses and individuals. Consequently, banks are sitting on funds that cannot be deployed profitably through traditional lending channels.
Liquidity Surplus Reaches Record Levels
The sector’s overall liquidity grew 26.47 per cent over the year to Tk 7.42 trillion in June, up from Tk 5.86 trillion a year earlier. Banks are required to keep Tk 3.27 trillion in reserves under cash reserve ratio and statutory liquidity ratio rules, leaving the remaining Tk 4.08 trillion as surplus funds. This distinction between total liquidity and the mandated reserve is key, as it defines the actual pool of money banks can freely use or invest. The sheer volume of these surplus funds suggests a systemic shift where capital is seeking safe harbors rather than productive projects.
Of the total liquidity, Tk 168 billion was held in foreign currency. The amount of excess liquidity jumped by Tk 712.28 billion, or 21.14 per cent, from May, when it stood at Tk 3.37 trillion. This surge is a direct result of deposit growth outpacing weak credit demand, a trend that shows no sign of slowing down. The rise in foreign currency holdings within the total pool indicates that a segment of the liquidity is international in nature, adding another layer of complexity to how banks manage their asset allocation strategies.
How Banks Manage the Surplus
With private-sector credit demand weak, commercial banks are parking part of their surplus funds in the central bank’s Standing Deposit Facility, or SDF. Banks placed around Tk 1.5 trillion in the facility in June, a record for the sector, despite its 7.50 per cent interest rate being well below the call money rate. This high volume of deposits into the SDF demonstrates a flight to safety by banks, who prefer the guaranteed return of the central bank’s facility over the volatility of the interbank market, even if the return is lower.
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This situation is not uniform across the sector. Some banks still rely on the call money market, interbank repos, and Bangladesh Bank’s repo facility to meet short-term funding needs and manage daily operations. Such borrowing rose from Tk 2.66 trillion in June 2025 to Tk 2.93 trillion in December before reaching Tk 3.97 trillion this June. The disparity in how different institutions handle their liquidity creates a two-tiered banking environment, where some institutions are flush with cash while others actively seek to borrow to bridge short-term gaps.
Mutual Trust Bank Managing Director Syed Mahbubur Rahman said shrinking investment opportunities could turn the growing liquidity surplus into a major challenge for banks. He noted that banks still have to pay interest to depositors even when they earn relatively little from idle funds. This dynamic creates a squeeze on bank profitability, as the cost of acquiring deposits remains high while the yield on the excess funds is minimal. The inability to lend profitably threatens the overall health of the banking ecosystem.
Shahjalal Islami Bank Managing Director Mosleh Uddin Ahmed agreed, pointing out that weak loan demand was swelling banks’ uninvested funds. He also suggested this dynamic could push lending rates below inflation, adding that the industrial fuel crisis has contributed to the slowdown in credit growth. By lowering lending rates to stimulate demand, banks risk eroding their net interest margins, which are already under pressure from the low returns on the SDF.
Bangladesh Bank data shows private-sector credit growth fell to 4.53 per cent in June, while deposit growth stood at 10.74 per cent. The disparity between the two growth rates highlights the underlying strain on the banking system. This gap of over six percentage points indicates a structural imbalance where the banking system is effectively absorbing more money than the economy can absorb, a scenario that can lead to inflationary pressures or financial instability if not managed carefully.
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