The average call money rate – overnight interest at which a bank borrows from another – stood at 6.51 per cent on Wednesday, hitting the highest average rate after February’s figure of 6.74 per cent.
Data published by the Bangladesh Bank show that the rate is the highest in seven months. The overnight borrowing rate remains equal to or less than the repo rate – the interest rate at which the central bank lends to other banks.
The current policy rate, or repo rate, is 6.50 per cent, which rose by 0.50 basis points from 6 per cent in the last Monetary Policy in July of 2023.
Market insiders say banks have been facing liquidity crises, and as a result, banks borrow money from each other overnight. On Wednesday, the highest call money interest rate was 7.75 per cent, while the lowest was 6 per cent.
On that day, the call money borrowed decreased by Tk 4,239.64 crore compared to the previous day's Tk 5,066.62 crore.
Banks usually borrow money from each other in three ways – call money loan for a day, short notice loan for two to 14 days, term loans for 90-180 days. Although the central bank has verbal instructions on call money rate, it has no say for the rates of short notice and term loans.
Speaking to The Business Post, former lead economist of World Bank Dhaka Office Zahid Hussain said, “The figures indicate that the banks are facing a liquidity crisis. The central bank had targeted a repo rate of 6.50 per cent in the last monetary policy.
“It usually tries to keep the call money rate below 6.50 per cent or equal.”
He added, “The increase in call money rate will raise our cost of funds, which in turn will ultimately narrow down our balance sheet [or decrease loan disbursement]. Because the lending rate of banks is controlled by the regulator, interest income will also go down.
“As per Bangladesh Bank'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.”
The treasury chief of a private bank, on condition of anonymity, said, “Banks are interested in borrowing money overnight because of the lower interest rate. The short-notice call money interest rate is higher than the overnight rate, and that is why banks prefer the former method.
“The central bank sold around $14 billion in FY23. The call money rate had reached 7 per cent in January this year.”
Meanwhile, a senior central bank official said, “The central bank supports liquidity through repo from its foreign exchange reserves. Actually, the regulator has injected a high volume of money to the scheduled banks to mitigate their liquidity crisis.”
