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Banks’ liquidity crisis pushes call money rate up

ASM Saad
16 Nov 2023 23:13:53 | Update: 16 Nov 2023 23:14:02
Banks’ liquidity crisis pushes call money rate up

The average call money rate — the overnight interest at which a bank borrows from another — was at 8.07 per cent on Thursday, hitting the highest average rate after October's 7.87 per cent.

The banks borrowed Tk 4,251.76 crore from the call money on Thursday. On the other hand, BB gave Tk 19,716.88 crore to the banks through repo on November 15.

Banks are continuously borrowing money from Bangladesh Bank (BB) through repo to tackle the liquidity crisis. Some Shariah-based banks have also been continuously getting support from BB.

Market insiders said this has happened as banks have been facing liquidity crisis for a while and they have been borrowing money from each other overnight as a result. They think that there are several reasons behind the increase in liquidity crisis in the country’s banking sector.

Talking to The Business Post on condition of anonymity, the managing director of a private bank said that several banks have failed to submit their statutory liquidity ratio (SLR) and cash reserve ratio to BB. “For this, these banks have to borrow money from the central bank and other banks.”

He also said, “Since last month, the regulator [BB] has been giving liquidity support to banks through repo, which increases the money supply. It is unexpected when the government is trying to curb high inflation. So I think it’s contradictory with the government’s decision.”

Eminent economist and Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, "If the central bank continues to provide liquidity support to the banks, it will mean the regulator has printed new money and this will hike the country’s inflation rate."

“Some Shariah-based banks are suffering from liquidity crisis as well. The regulator has to support them for banking operations,” he said.

He added, "BB facilitates liquid money through the repo, and this system also increases the money supply in the economy. As a result, inflation has been high. It should reduce the supply of money."

UCB Managing Director Arif Qadir said, “The rise in call money rate will raise our cost of funds, which in turn will ultimately narrow down our balance sheet [or decrease loan disbursement]. Since the lending rate of banks is controlled by the regulator, interest income will also go down.”

“As per BB’s Six Months Moving Average Rate of Treasury Bill (SMART), banks are offering 10.14 per cent interest on lending. So, the situation is impacting the banks’ balance sheet directly,” he said.

Banks usually borrow money from each other in three ways – call money loans for a day, short-notice loans for two to 14 days, and term loans for 90 to 180 days. Although the central bank has issued verbal instructions on call money rates, it has no say in the rates of short-notice and term loans.