The inter-bank call money rate has been increasing alarmingly amid a liquidity shortage in the banking system.
Market insiders said a surge in the US dollar purchases by banks, imbalance between deposit and loan outflows and mounting pressure on banks to reserve provisions against defaulted loans have fuelled the tumult.
The call money rate is the interest rate on overnight or short-term loans from one bank to another to meet urgent needs.
The weighted average rate on call money rose to 5.54 percent on Jul 28 from 4.42 percent in June. The rate was 3 percent in December 2021, and 2.23 percent in June 2021, according to data from Bangladesh Bank.
At present, the maximum overnight call money interest rate has risen to six percent.
For borrowing up to seven days and more, banks are being charged an interest rate of up to a maximum of 10.5 percent.
Banks usually go for such short-term loans to fill the asset-liability mismatch, to comply with the statutory cash reserve ratio, or CRR, and statutory liquidity ratio, or SLR, requirements and to meet the sudden demand for funds.
Bankers, however, believe the rise of the call money interest rate will effectively increase the interest rate on large deposits, the most effective tool to counter a period of recession.
WHY THE SUDDEN CRUNCH?
Bangladesh has opted to tighten its belt by deploying various other tools to deal with rising inflation, which hit a nine-year high of 7.56 percent in June because of the price spiral of food products and the rise in import costs.
To help banks meet the demands of surging import costs, the central bank injected more than $1 billion into the country’s banking system in July alone. In the last fiscal year, Bangladesh Bank sold a record $7.62 billion to local banks from its coffers, recent data shows.
As a result, the foreign exchange reserve stood at $39.49 billion on Jul 28, down from $46.15 billion in December last year.
The government's borrowing from the formal banking system has soared radically in the last financial year, which has put liquidity pressure on banks.
Insiders said the liquidity crisis has grown acute because of the threefold effects of the government's increased borrowing from the banking system, the purchases of US dollars by banks to settle import bills, and the rise in the treasury bill rate.
A rapid surge in government borrowing was observed at the end of the last fiscal year.
The amount was at Tk 647.5 billion at the end of the fiscal year, which was significantly higher than the borrowing target from the banking channel outlined by the government at the beginning of the last fiscal year, according to recently published data.
Finance Minister AHM Mustafa Kamal proposed to borrow Tk 1.06 trillion from the country’s banking system in the new fiscal year to meet the deficit. The target was 14 percent higher than the revised target in the last fiscal year’s budget.
In fiscal year 2020-2021, the government borrowed Tk 260.7 billion from the banking channel.
Such heavy borrowing has raised the credit growth to over 14 percent.
Simultaneously, Bangladesh Bank increased its policy rate by 25 basis points to curb inflation in May.
The policy rate, known as the repurchase agreement, is at 5 to 5.5 percent as of now.
In addition to the liquidity pressure, the increase in the repurchase agreement rate on loans has prompted banks to increase the purchase of US dollars in exchange for liquidity.
The dual pressure has created a unique phenomenon, which bankers have been calling 'Liquidity Dryness'. The term is used to describe a situation where the liquidity crisis faced by banks takes an acute form.
Due to a cash crunch and to meet the increasing demand, banks have been borrowing money from the interbank money market at higher interest rates than before and changing interest rates on deposits from six to seven percent.
Association of Bankers, Bangladesh (ABB) Chairman Selim RF Hussain believes the whole banking sector is under pressure from higher interest than before in every aspect.
"During the pandemic, which was not so long ago, banks had excess liquidity. But as soon as the economy started to go back to its previous form after reopening, imports soared significantly, which forced the banks to purchase more US dollars, approximately $7 billion more, than usual from Bangladesh Bank,” he said.
“The flow of credit for both private and public sectors soared, but the deposit did not amplify accordingly, despite banks offering higher interest rates.”
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said it is high time for banks to increase the interest rate on deposits to avoid a recurring liquidity crisis.
"In last one year, banks have spent over Tk 800 billion [approximately Tk 758.5 billion] alone to buy more than $8 billion. We have no other way, except for increasing the call money interest rate in every aspect, to meet the cash demand. I would not be surprised if the interest rate on deposits rises sharply soon,” he said.
IMPACT OF HIGHER INTEREST RATE ON TREASURY BILLS, BONDS
Another reason market insiders have pointed out for the cash crunch is the recent reluctance of solvent banks to participate in the call money market.
Experts are saying that banks with sufficient deposits would rather invest in treasury bills and bonds, which yield higher profits, instead of the call money market for a short period.
This change of investment direction has reduced the flow of liquidity in the market and pushed the interest rate higher.
According to data from the central bank, on Jul 18 2021, banks would have yielded 91-day treasury bills at a 0.61 to 0.63 percentage rate. The 'cut-off yield' rate was at 0.63 percent.
A year later, on Jul 28 this year, the yield on the 91-day Treasury bill rose to 6.24- 6.35 percent and the cut-off yield rate has risen to 6.35 percent.
[Writing in English by Adil Mahmood, editing by Shoumik Hassin]