How can Govt Control the Money Market Amid this Crisis?

Badrul Millat Ibne Hannan: Banking sector of Bangladesh is facing hard time for various reasons. One of the rationalities has been added into the existing reasons is excessive hard cash lifting by depositors recently. Though the cash withdrawal by depositors is a normal activity in Banking sector. But it is a matter of panic when excessive hard cash lifting from Banks and keeping into own custody and why they lift such.

Bankers maintain a condensed relation with the clients. As money makes a sense and a matter overhere. So, depositors and investors as well as well-wishers share pros and cons to the bankers about their earned money. From the depositors’ transactional behavior and relationship, the reason has been identified that this is occurring due to the rumor created by some nefarious people and malpresentation of news circulated by some medias along with social medias. There may have ill motive behind the rumor.

The economy of the country has been overcoming under various crisis like COVID-19, Russia-Ukraine war, the price of US dollar ups.

The rumor has fueled to the fire. But such type of nefarious people may not know the effect of rumor and the losses of the people of the country.

Banking business is based on the trust and faith with depositors and investors. When people bear less trust on banks, they may lift the money from banks. This is not only one reason. Trust is central to the success of a bank. It can drive engagement, increase loyalty and has a direct impact on a bank’s bottom line. Customers should feel that they can trust their financial services partner to provide them with products and services that they really need.

See More:
Alternative Reserve Currency Envision

Every Bank must maintain CRR Cash Reserve Requirement Ratio as per Central Bank’s requirement to operate its daily smooth functioning. In Bangladesh-Cash Reserve Requirement Ratio was set as 4.0 % in Oct 2022 and Statutory Liquidity Ratio: Scheduled Banks data was reported at 13.000 % in Oct 2022. This stayed constant from the previous number of 13.000 % for Sep 2022. Bangladesh Statutory Liquidity Ratio: Scheduled Banks data is updated monthly, averaging 16.000 % from Nov 2003 to Oct 2022, with 228 observations.

Beside CRR and SLR, money creates money in Banking sector by fractional reserve. Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending. Today, most economies’ financial systems use fractional reserve banking. Nor are banks required to keep the entire amount on hand. Many central banks have historically required banks under their purview to keep 10% of the deposit, referred to as Reserves-source Investopedia.

The central banks all over the world have a reserve requirement. This means that at every step of the process, they have to deposit let’s say 10% of their deposits with the central bank whereas the rest can be used to create bank loans. When the remaining 90% of the money is loaned out, new money is created.

Though fractional reserve has some very disadvantage like- the fractional reserve system puts banks at a constant risk of bank runs since they only keep 10 percent of the money people have deposited. Once depositors wish to withdraw funds that are greater than the reserves held at the bank, these financial institutions may collapse. In Bangladesh, no bank has been shut down to till now due to the such reasons.

However, the effects of excessive hard cash withdrawal from Banks are too many. Some of these are-
1. Excessive hard cash on hands propels people to buy unnecessary products.
2. It makes people lazy and diverse themselves from works.
3. Economy may go out of control.
4. Some people will control the entire market.
5. Price level of the commodity surely goes up.
6. Turmoil in market discipline will be created.
7. Some twister people try to attract the persons who bear hard cash into vault for investment their money in alluring but trap project like-Unipay, Destiny, Neway etc.
8. Peace and stability of the country may be hampered.
9. Some people may use their money terrorist financing which may damage the image of the country to the international world.

Many countries of the world have faced the such type of situation and taken steps for controlling. For example- The Republic of India witnessed the second major monetary reforms in November 2016 when it withdrew the legal tender status of INR 500 and INR1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

On 8 November 2016, the Govt. of India announced the demonetization of all INR 500 and INR 1000 banknotes of the Mahantma Ganddhi. It also announced the issuance of new INR 500 and INR 2000 banknotes in exchange for the demonetized banknotes. Prime Minister Narendra Modi claimed that the action would curtail the shadow economy, increase cashless transactions and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.

The announcement of demonetization was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy. People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90.26 billion (9026.6 crore) banknotes in circulation were INR 500 and INR 1,000 banknotes. Before demonetization (November 2016), there were banknotes worth INR 17.97 trillion in the market. The demonetized banknotes constituted 86.4% of it.-source Wikipedia.

Indian government had strong logics for banning INR 500 and 1000. The government said that the main objective of the exercise was curbing black money, which included income which had not been reported and thus was untaxed; money gained through corruption, illegal goods sales and illegal activities such as human trafficking; and counterfeit currency. Though there had argument of demonetization a success or failure in India. Thus, digital transactions have increased by around 50-55% points since demonetization. Increase in digital transactions = RBI has to print fewer notes = save printing costs of the government. In addition to demonetization, digital transactions have also been boosted by the launch of BHIM and UPI App.

As a result, the following things occurred-
1. Cash Money circulation in market was controlled.
2. Price level of the commodity could not go out of control.
3. The fear of terrorist financing overcame.
4. Persons who kept money into their own custody instead of keeping Banks’ Account had been loser.

Analyst: Md. Badrul Millat Ibne Hannan, MPA, AIS, (DU), Certified Financial Consultant (CFC, IFC, Canada), ACCA (Final Leve). Currently working at Islami Bank Bangladesh Limited