In recent times, government securities (G-sec) have become increasingly popular among institutional and individual depositors as their investments in treasury bills and bonds have seen a significant surge. This trend has coincided with a tightening of bank deposit options, leading depositors to seek out alternative investment avenues. The allure of record-high returns on government securities has prompted both categories of depositors in the banking sector to divert their funds into these risk-free instruments, despite the somewhat cumbersome procedures involved.
The shift from traditional bank deposits to sovereign bills and bonds has put additional pressure on banks’ liquidity reserves, exacerbating the ongoing liquidity squeeze in the banking sector. Depositors have found government securities to be more profitable than bank rates, especially as other investment options have become limited. As a result, large depositors have increasingly turned to treasury bills and bonds, the primary instruments through which the government borrows money from the banking system to cover budget shortfalls.
According to data from the central bank of Bangladesh, institutional and individual depositors predominantly participate in non-competitive bids for government securities, ensuring that their offers are accepted without facing competition at the weighted average rate. Institutional depositors include financial institutions, insurance companies, corporate bodies, and provident/pension funds, all of which have significantly increased their investments in G-secs in recent years.
Financial institutions saw a 210% increase in their investments in government securities from FY’23 to FY’24, while insurance companies, corporate bodies, and provident/pension funds also recorded substantial growth in their contributions. Individual investors witnessed the highest growth rate, with a 328% increase in their investments in government securities in FY’24 compared to the previous fiscal year.
The surge in demand for government securities has led to a shift in the dynamics of the auction process, with more institutional and individual investors opting for non-competitive bids to avoid the risks associated with competitive bidding. The attractive yields offered by treasury bills have further incentivized depositors to choose these instruments over traditional bank deposits, leading to a significant increase in their participation in government securities auctions.
As the rates on treasury bills continue to outpace those offered by commercial banks, institutional and individual investors are expected to further increase their investments in government securities. This trend has put additional strain on banks, which have seen a slight decline in their share of investments in G-secs despite an overall increase in their investments. The ongoing liquidity crunch in the banking sector has further highlighted the growing preference for government securities among depositors seeking higher returns in a challenging economic environment.
