Excess liquidity occurs where cash flows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. This is reflected in holdings of reserves in excess of the central bank's required reserves. The importance of excess liquidity for central banks is threefold and lies in its potential to influence: (1) the transmission mechanism of monetary policy; (2) the conduct of central bank intervention in the money market, and (3) the central bank's balance sheet and income.
While the causes of
excess liquidity in Bangladesh subject to more research, some of the apparent
reasons are as follows:
* The investment activities have declined in the country.
* Due to the Hall-Mark loan scandal and other scams,
banks in the country, especially private commercial banks, became more cautious
in approving loans. This also contributed to accumulation in excess liquidity.
* Due to the fall of share market,
people lost their confidence in the capital market and there is a lack of other
scopes to go to the capital market in the country. Therefore, people go to the
banks for FDR (fixed deposit receipt) and savings certificate for securing safest investment. This has obviously
helped banks to
increase their deposits
whereas the disproportionate credit demand has contributed to the accumulation
of excess liquidity.