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Bank & Finance - January 14, 2024

Banks crying for liquidity interest rate shooting up

Mahfuz Emran : At least a dozen banks are facing severe liquidity crunch due to irregularities, corruption and lack of confidence. Some of these banks are in very fragile condition.
Apart from Bangladesh Bank, these banks borrow cash from each other every day. Strong banks lend to weak banks. This system of inter-bank lending is called the call money market in banking parlance. Interest rates are rising in the money market.
It is known that Bangladesh Bank has used interest rate hike as one of the tools to reduce high inflation. That is why the interest rate ceiling has been withdrawn from the beginning of the current financial year (2023-24). Which has a direct impact on the financial market.
And on the last working day last Thursday, the interest rate in transactions in call money was 9.37 percent. About 5 and a half thousand crore rupees were traded on this day.
Although in January 2022 the interest rate of call money was 2.72 percent. As such, the average interest rate of money in two years has exceeded 6 and a half percent, which can have an adverse effect on investment, production and employment, bankers and economists believe.
According to the latest report of Bangladesh Bank, the average interest rate of money on the last working day of last week was 9.37 percent. And last year (in 2023) on January 11, this interest rate was 6.74 percent.
The average interest rate of call money on the same date of the previous year (2022) was 2.72 percent. Accordingly, the interest rate of call money increased by 6.65 percent in just two years. However, on the last working day of the outgoing year, the interest rate was 9.19 percent.
Syed Mahbubur Rahman, Managing Director (MD) of Mutual Trust Bank said, “The demand for additional money has been created in the banking sector. Some banks have liquidity-crunch. Due to these reasons,
most of the banks are meeting the demand of cash by borrowing call money. In this case, the interest rate is a little higher, but it can be said that it is less important.
According to sources, the growth of bank deposits is relatively slow. Again, most banks spent a lot of cash to buy dollars. In addition, the central bank has withdrawn money from the market by selling about 6 billion dollars in the last six months.
Banks are facing liquidity crisis. Banks are turning to loans to meet the demand for cash.
Policy Research Institute (PRI) executive director Ahsan H. Mansoor said, “money laundering, increase in dollar prices has led to a liquidity crisis in banks. To deal with the liquidity crisis, one bank is borrowing money from another bank at high interest.
It is known that banks borrow money from each other for a day to meet daily needs. It is called call money market. When the bank faces a cash or liquidity crisis, it borrows money.
Generally, when the demand for cash increases, the demand for cash increases and when the liquidity crisis decreases, the demand for cash decreases. Call money Bazaar was launched in the early 1980s.
Bangladesh Bank has announced a contractionary monetary policy for the current fiscal year (2023-24) to control high inflation. The policy of raising interest rates to reduce the money supply, which is based on the six-month average interest rate on the government’s Treasury Bills, was introduced last July by Smart Interest.
This has also affected interest rates. It has also withdrawn cash from the market by selling nearly $6 billion in the last six months. This has created a crisis of money in the market. As a result, many banks are facing liquidity crisis. So, these banks are forced to borrow money to cope with the pressure of cash.

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