Home ›› 09 Mar 2022 ›› Front
Rising import payments and higher credit demand during the pandemic recovery period have left some banks gasping for deposits as they fail to woo depositors even with higher interest rates.
A senior Bangladesh Bank official blamed some banks’ management for their liquidity crunch as bankers warned that their demand for funds would intensify in the coming days.
In January, private sector credit growth hit a 30-month high to 11.07 per cent in a strong sign of recovery from the Covid-19 pandemic’s shock, said Syed Mahbubur Rahman, the Mutual Trust Bank (MTB) managing director and CEO.
“Now we are not getting deposits even after offering 6 per cent interest,” he said.
In January, the weighted average interest rate on deposits stood at 4.01 per cent, up from 3.99 per cent in December last year, Bangladesh Bank data show.
Now the call money rate (overnight) is at over 3 per cent, which hovered around 2.5 per cent in December.
The call money rate is the interest rate on a type of short-term loan from bank to bank to meet emergency needs.
In January, MTB’s weighted average interest rate on deposits stood at 4.35 per cent, up from 4.23 per cent a
month ago.
The weighted average interest rate on deposits at most banks, including Trust Bank, Dhaka Bank, Brac Bank, The City Bank, IFIC Bank, Pubali Bank, Eastern Bank, Southeast Bank and Social Islami Bank, also rose slightly.
“An increasing private sector credit growth and a sharp rise in import payment are pushing up banks’ demand for funds, which in turn, led to higher interest rates on deposits and a rise in call money rate,” Rahman said.
Fund demand ‘temporary’
In the current FY’s July-January period, the settlement of letter of credit (LC), the actual import payment, stood at $45.48 billion, up by 52.5 per cent year-on-year.
LC settlement for petroleum import rose by 89.24 per cent to $4.03 billion; LC settlement for capital machinery import increased by 61.04 per cent to $3.04 billion; and LC settlement for intermediate goods import shot up by 58.11 per cent to $4.02 billion, BB data show.
The sharp rise in import payments prompted banks to purchase US dollars from BB. In the July-January period, BB sold a record $3.15 billion to the banks, up from $235 million in the entire 2020-21 FY.
“The current demand for funds at the banks is temporary,” said Emranul Huq, Managing Director and CEO of Dhaka Bank.
He said the demand for funds increases when the Bangladesh Petroleum Corporation (BPC) pays for oil imports. “BPC recently paid $500 million for oil imports, which affected the money market abruptly, pushing up the call money rate by around 1.5 per cent,” he said.
Raising interest rates further
A sharp rise in import payment and increasing credit demand has slightly pushed down the banking sector’s excess liquidity. In December last year, the banking sector’s surplus liquidity was Tk 2,16,000 crore, down from Tk 2,17,000 crore in November 2021, BB data show.
BB’s Chief Economist Md Habibur Rahman said they constantly monitored the money market. “The situation isn’t bad now,” he told The Business Post. “We are always ready to support the money market in any tight situation.”
He said the interest rate on deposits should be raised further since it is still below the inflation rate.
In January, the inflation rate stood at 5.86 per cent, according to the Bangladesh Bureau of Statistics.
The BB economist said some banks have a liquidity shortage, while others have excess liquidity and blamed the management for the fund crunch.
Banking sector ‘braces for impact ‘
Centre for Policy Dialogue’s distinguished fellow Mustafizur Rahman said the surplus liquidity in the banking sector would decline in the upcoming days.
He said the macroeconomy was under pressure due to the global tension and rising inflation rate.
The fuel price has recently shot up to record highs after Russia invaded Ukraine last month, inching close to $140 a barrel. It can go up further if the crisis is not resolved soon.
“The government has to either raise fuel prices further or spend more on subsidy. This could put pressure on the banking sector,” CPD’s Rahman told The Business Post.
