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Bangladesh - November 18, 2021

Money market heating up

Staff Correspondent: The inter-bank call money rate was 18-month highest yesterday as the cash demand has increased significantly during the recent days. The call money rate was almost 3.5 percent yesterday due to the high cash demand in some banks.
On Monday, interbank call money transaction was worth Tk8,360 at a rate of Tk3.25 although the number of transactions increase significantly.
Concerned parties say that after fixing the minimum interest rate on bank deposits, many banks are not able to pay interest on the deposit. At the same time, although the deposits of many banks have decreased, the amount of loans remained the same. Yet, banks have to save Advance Deposit Ratio (ADR) and Statutory Liquidity Ratio (SLR) against deposits and loans. That is why banks are relying on the money market and its rates are rising sharply.
One week ago, the amount of call money transaction was Tk8,748 and the rate was only Tk2.27.
Central Bank data says the call money rate was Tk1.78 in January, which rose to Tk2.8 in May and dropped to Tk2.25 in June. The rate was below Tk2.00 in August but since the first week of November it started rising.
Bank officials said deposits at most banks were declining. In addition, the banks have to keep 13 percent of cash in the form of SLR with the central bank against the loan. So, the banks are more inclined to the money market to collect money, as a result of which the money market rate is increasing.
A senior official of the treasury department of a state-owned bank said demand for loans has grown significantly with the improved Covid-19 condition. Banks with large general deposits are investing in various central bank bills and bonds rather than investing in the money market. Due to the liquidity crisis in the money market, its exchange rate is increasing.
He added that the demand for money from banks was huge in the money market on Tuesday. On Tuesday, the amount of loans of banks is the same as the previous day, but the average market rate would be more than 4 percent.
In this regard, a senior managing director of a second-generation commercial bank told Daily Industry the banks’ liquidity went up during the epidemic. At present, Covid-19 has come down and investment has increased. Consequently, liquidity is decreasing. The banks consider where they can invest and which one would be more profitable. Many banks are investing in central bank’s bond-bill because of good interest rates. As a result, less amount is disbursed in the money market and its rate is increasing.
The call money rate from bank to bank was Tk0.5-0.6, which has increased. On the other hand, the rate of bond-bill of the central bank has increased. As a result, the lending banks prefer bond-bill to money market, he added.
Managing Director of Agrani Bank Mohammad Shams-ul-Islam said many people think that the rate in call money market rate is increasing as government banks have invested in central bank’s bill-bond, which is not true. Central bank bills and bonds are open to all. Everyone can invest there if they want.
“The increase in call money rate reflects that the country’s economy is recovering. The rate is increasing as investment in various sectors has grown following the improved situation of the epidemic,” he added.
Meanwhile, according to the central bank’s report, the number of banks whose deposit growth was negative on 30 September stood at 10 – Brac Bank, Dhaka Bank, Jamuna Bank, Mutual Trust Bank, NCC Bank, Prime Bank, Standard Bank, Shimanto Bank, Shahjalal Islami Bank and Alfalah Bank (foreign).
Conventional banks can lend Tk87 against a deposit of Tk100 and Islamic banks can lend Tk92. This is known as debt-to-deposit ratio (ADR).
The banking sector of Bangladesh is one of the hardest hit sectors of the economy, owing to the broad-based slowdown in the economy as a whole; combined with its exposure to the hardest hit sectors of the economy, such as foreign trade, RMG and the capital market.
The sector is already struggling prior to the pandemic owing to the imposition of a 9% interest ceiling on all loans (except credit cards), liquidity pressures and a persistently deteriorating non-performing loan (NPL) situation.
However, owing to the COVID-19 pandemic and subsequent lockdown, the banking sector will face an acute crisis on multiple fronts, as banks’ asset quality is likely to deteriorate while their interest and fee-based income are all affected at the same time. Lending cap will take a heavy toll on SME and retail businesses- The lending cap policy, which took effect from April 1, 2020 risks hitting a financial sector that is already reeling from multiple problem coming from different fronts.
The Covid-19 crisis has significantly exacerbated the risks and problems in the sector. Not being able to price loans effectively will essentially force commercial banks to turn the tap off to the segments of economy – small and medium-sized enterprises – most affected by the crisis, exactly when liquidity is much needed.
The cautionary alarm was raised by Dr Enayet Karim, President of the Global Economist Forum (GEF) indicating that cost of income ratio of SME segment raised to 130 percent from its previous level of 85 percent effectively making the segment a loss project. He also noted that “the Interest rate capping was practiced during the ’70s. Later, in 1990, free market policies were taken up by the government to reform the financial sector, and that is why the banking sector grew at such a large scale. Now, this interest rate cap is taking the sector 30 years back.”
Naser Ezaz Bijoy, country head of Standard Chartered Bank, opined that the NPL problem leaves Bangladesh poorly prepared to withstand the coronavirus fallout, while the pandemic’s implications will increase the number of bad loans.
In 2019, long before Covid-19 hit, NPLs surged by more than 117 percent. So-called soured loans topped $12 billion. That is not a huge tally relative to developed nations, but it is undeniably detrimental to a poverty-stricken, $330 billion economy where banks comprise more than 80 percent of all financing activity.

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