Banks Awash with Cash as Investment Freeze Threatens Growth

Bangladesh’s private sector is running out of appetite for borrowing, raising fresh concerns over investment, industrial expansion and job creation as credit growth sinks to a dangerously low level despite a record liquidity surplus in the banking system.

Private-sector credit growth fell to just 4.47 per cent in June, down from 4.98 per cent in May, while excess liquidity in banks surged to a record Tk 4.08 lakh crore at the end of the month.

The striking divergence has exposed a growing weakness in the economy: banks have money, but businesses are not willing�"or able�"to borrow it.

Excess liquidity jumped by Tk 71,000 crore in a single month, from Tk 3.37 lakh crore in May to Tk 4.08 lakh crore in June. Over the past year, the surplus increased by Tk 1.25 lakh crore from Tk 2.83 lakh crore at the end of June 2025.

Economists and business leaders warn that the collapse in private credit demand is no longer merely a banking-sector problem. It is increasingly becoming a threat to investment, production and employment.

Prolonged economic uncertainty, high borrowing costs, rising business expenses, unreliable gas and electricity supplies and policy uncertainty are discouraging entrepreneurs from taking on fresh loans for new projects or expansion.

“Private-sector credit growth falling below 5 per cent is a worrying signal for the economy,” said Mazidul Haque, chairman of the Policy Think and Economic Research Centre and an economic analyst.

He said heavy government borrowing from the banking system was creating a crowding-out effect, absorbing funds that could otherwise have flowed into private investment.

At the same time, high policy interest rates aimed at containing inflation have increased the cost of borrowing, while gas and power shortages have further undermined the business case for new investment.

Many banks are also suffering from capital shortages and are therefore becoming increasingly cautious about lending, Haque said.

Unless credit and investment regain momentum, production and employment will remain subdued, increasing the risk of prolonged economic stagnation, he warned.

Economists say the record liquidity surplus is making the private-credit slump even more alarming. 

Instead of financing new factories, machinery and business expansion, banks are increasingly placing surplus funds in relatively safe government treasury bills and bonds or with Bangladesh Bank. 

This has created a stark paradox: a banking system drowning in liquidity while the productive economy faces a credit drought.
Under existing regulations, banks must maintain 4 per cent of deposits as the cash reserve ratio and 13 per cent as the statutory liquidity ratio. Funds held beyond these mandatory requirements constitute excess liquidity.

A large portion of the surplus is being invested in government securities, which offer banks relatively secure returns and can be converted into cash when needed.

Meanwhile, weak demand for private credit suggests that entrepreneurs are largely borrowing only to keep existing businesses running and meet working-capital requirements rather than investing in expansion.

After years of inadequate lending scrutiny and a sharp deterioration in asset quality, banks are now demanding stronger business viability, collateral, cash flows and repayment capacity from borrowers.

As a result, even banks with substantial surplus funds are increasingly reluctant to take the risks associated with private-sector lending. The consequences are already visible in the money market.

Commercial banks’ combined borrowing through the call money market, interbank repo and Bangladesh Bank repo fell to Tk 2.80 lakh crore in July, from Tk 3.97 lakh crore in June�"a drop of Tk 1.18 lakh crore in just one month.

Ejazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), said banks had ample liquidity because deposits were growing much faster than loans.

Private-sector credit growth remains below 5 per cent, while deposit growth is above 10 per cent, he said. This has reduced banks’ dependence on the central bank and interbank market for day-to-day liquidity. The simultaneous rise in excess liquidity and fall in short-term borrowing indicates weak demand for fresh investment and credit across the economy, he said.

Bangladesh Bank has introduced several measures to reverse the credit slowdown, including a Tk 60,000 crore low-interest stimulus package announced in May. The central bank has also raised the credit exposure limit for large business groups and single borrowers from 15 per cent to 25 per cent and reduced its policy interest rate to encourage lending.

But economists say cheaper and more abundant credit alone will not revive investment unless businesses regain confidence in the economic environment. “If the credit freeze persists, the consequences could extend well beyond bank balance sheets�"slowing industrial production, suppressing employment and threatening to prolong the economy’s already fragile recovery”, said an economist.