BB Circular

Call money rate drops below 3 per cent

The weighted average call money rate in the country’s banking system has remained below 3 per cent for the last one-and-a-half months mainly due to the Bangladesh Bank’s expansionary monetary policy coupled with its measures to tackle the coronavirus outbreak, resulting in an excess cash flow in the banking system.

Due to the excess liquidity supply, the banks were lowering the interest rate of deposits further to keep their profit margin intact, said experts. The situation would be beneficial for businesses but would create problems for general people, including fixed income earners and retired professionals whose incomes are dependent on bank interests, they said.

Speaking about the reason behind the excess liquidity in the banks, Policy Research Institute executive director Ahsan H Mansur told that the drop in import had resulted in a foreign exchange reserve pile‑up in recent days and that why the supply of money on the market had been increasing. Against the increased volume of reserve, around Tk 65,000-Tk 70,000 crore was injected into the market, Mansur said, adding that another Tk 70,000 crore was injected into the money market against the stimulus packages.

Apart from the local market situation, the lending situation on the global market has also been contributing to the pile-up of excess liquidity on the local market as many of the country’s businesses were taking loans from overseas banks at around 3.5 per cent, he said. Mansur said that overseas loans of the businesses were also increasing liquidity on the local market.

The banker said that the central bank had been injecting money into the country’s banking system in different ways to keep the banking sector hydrated with adequate cash following the coronavirus outbreak with a view to reviving the country’s private sector which had been dealt a heavy blow. An International Finance Corporation study report showed that 64 per cent of the country’s micro, small and medium entrepreneurs had suspended operations temporarily or kept their operations open partially, leaving 37 per cent of the workers employed in the sector jobless.

Even though the government announced a number of stimulus packages for different sectors in April this year, the country’s private sector credit growth remained very low at 9.36 per cent, far below the central bank’s projection to attain 14.8 per cent growth in the current fiscal year. To support the private sector credit growth, the central bank has lowered the bank rate, banks’ cash reserve ratio, repurchase agreement rate and injection of huge high powered money against the purchase of dollar, among other things.

Due to the huge cash flow in the banks, the inter-bank call money rate dropped below 3 per cent on September 7 and has been staying within 3 per cent since. Besides the fall in the rate, average daily borrowing from the call money market by the banks also dropped by 22.40 per cent in October compared with September.

In September, daily average borrowing by the banks from the market was Tk 7,088.98 crore while the figure dropped to Tk 3,954.53 crore in October. Within the period under consideration, the lowest amount of Tk 2,173 crore was borrowed from the call money market on October 22 while the call money rate dropped as low as 0.30 per cent on September 8.

The banks’ borrowing from the market was above Tk 8,000 crore even on September 1 when the weighted average call money rate was 4.27 per cent. Speaking about the impact of excess liquidity in the banks, Mansur said that the situation had been playing a supportive role for the businesses as loans were becoming cheap. On the other hand, the depositors, mostly the general people, are becoming victims of the situation, he mentioned.

It is widening the gap between the rich and poor, he said. As the banks were having excess liquidity in their hands, some were trying to issue credit to their customers aggressively even at rates lower than the BB-set ceiling. The managing director of a leading bank told that they were even ready to borrow at 8 per cent interest rate due to the huge supply of liquidity. To some extent, the liquidity has become a burden for the banks also, he said.

Shamsuddin Akanda

I am, Mohammad Shamsuddin Akanda, working as an officer in Islami Bank Bangladesh Limited, the largest bank in the country. I have been developing Banker Blog for a long time. Undoubtedly, this is an excellent and wonderful platform for the bankers. I write on this blog whenever I get time. I'm eager to learn the unknown aspects of Economics and Banking, especially Fintech, and I share as much as I can with everyone. If you get time, you can take a peek at my Blog (Banker)-

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