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Bank & Finance - April 25, 2024

Most banks borrowing from central bank

Acute liquidity crisis

Syed Nasir Hossain : Even after Eid-ul-Fitr, the liquidity situation in the country’s banking sector has not stabilized. Rather, the cash crisis has increased in most of the banks. Two-thirds of the banks are borrowing money from the central bank to meet daily transactions. Last Monday also, the amount borrowed from the central bank was Tk 18,612 crores.
On the same day, more than Tk 3.5 billion were borrowed from the Interbank Money Market (Kolmani). As the demand is intense, the interest rate of the call money market is still more than 9.5 percent.
There is a liquidity crisis in the country’s banking sector for more than a year. The crisis intensified before Eid-ul-Fitr. On March 27, more than 40 banks borrowed a record Tk 28,867 crores from the central bank. At that time, it was said from Bangladesh Bank and commercial banks that cash transactions increased in the country before Eid. Due to this, the pressure to withdraw cash from the bank increases. After Eid, the cash left in the hands of traders and customers will return to the bank. Then the liquidity situation will also be normal.
Although the liquidity situation in the banking sector has not normalized in the last one week after Eid. Rather, the cash crisis in some banks has become more acute at this time. Customers are withdrawing deposits, especially from banks that are in merger-acquisition talks. Due to this, the flow of cash in those banks has decreased.
BASIC Bank among the banks in merger talks. The government-owned bank is in talks to merge with the private sector City Bank. Government institutions are also withdrawing their deposits from Basic Bank. The concerned said that deposits of about Tk 2000 crore have been withdrawn from the bank this month.
Basic Bank Managing Director (Acting) Abu Md. Mofazzel told, “Most of the deposits of Basic Bank are from government institutions. As it is known as a state-owned bank, government institutions keep deposits here. Now, as talks of merger with a private bank spread, government institutions are writing to withdraw deposit money. In the meantime, huge deposits have been withdrawn. Basic Bank Board has sent a letter to the government informing about the situation. We are waiting for a clear direction from the government and Bangladesh Bank.
By reviewing the data of Bangladesh Bank, it can be seen that the first working day after Eid-ul-Fitr, i.e. April 15, the demand for cash was intense in the banks. On that day, the amount of money borrowed by the commercial banks from the central bank was Tk 19,591 crores. On the same day, Tk 4,343 crores were borrowed from call money market. After that, the amount of money borrowed from the central bank fluctuated from Tk 16,000 to Tk 20 thousand crores every day. And the amount borrowed from call money market was Tk 3,000 to Tk 5 thousand crores. Although the interest rate of one day term loan is 9.5 percent, money is not meeting the demand in the money market. That is why the banks are forced to borrow money from the central bank.
Banks facing cash crunch are now collecting fixed deposits at 11 to 13 percent interest. The top executives of some private banks of the country said that term deposits are not available even after offering more than 11 percent interest. The interest rate on government treasury bills is now 11.5 percent. Many customers from public and private institutions and individuals are also now buying treasury bills directly. Again, due to various negative campaigns about the banking sector including merger-acquisition, the crisis of confidence among customers is increasing.
The central bank adopted the policy of increasing the interest rate on bank loans in July last year, saying that the rate of inflation should be reduced. At the same time, initiatives were taken to control the flow of money in the market by raising the policy interest rate to 8 percent. Due to the liquidity crisis and the central bank’s policies, the interest rates of bank loans are continuously increasing in the country. In this April, the maximum interest rate of bank loans has been fixed at 13.55 percent. Until June last year, the maximum interest rate on bank loans was fixed at 9 percent. Accordingly, the loan interest rate has increased by 4.55 percent in the last nine months.
However, the impact of interest rate hike on inflation is not yet visible. In the last March, the average rate of inflation in the country was 9.81 percent. According to Bangladesh Bureau of Statistics (BBS) data, the country’s inflation rate has been above 9 percent for 21 consecutive months. Economists say that the country’s actual inflation rate is much higher than the BBS data.
The growth of deposits in the country’s bank sector has been slow for two years. In January this year, the growth of deposits increased slightly, but it was limited to 10.56 percent.
Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank (MTB) believes that high inflation has an adverse effect behind this. He told, “The cost of living has increased due to high inflation.” Common people do not have money to save. Many are making a living by breaking savings or taking loans from banks.
Syed Mahbubur Rahman said, “The country’s banking sector is under pressure due to liquidity. Even after Eid, the pressure does not seem to have eased. The government has increased borrowing from the banking sector. In the next two months, the tendency to take loans may increase. Then the crisis may increase. In the current situation, the government has no option but to increase its income. At the same time, the government should take initiatives to reduce expenditure by excluding unnecessary projects.
Amid the liquidity crisis, the government has increased borrowing from the banking sector. Apart from taking loans through treasury bills and bonds, the government is also issuing special bonds against subsidies in various sectors including electricity, fertilizers. Due to the shortfall in revenue collection, the trend of government borrowing will increase in the future, said those concerned. According to the data of the National Board of Revenue (NBR), in the first nine months (July-March) of the current financial year, the shortfall in revenue collection was Tk 21,879 crore.
Bankers believe that the interest rates of treasury bills and bonds are gradually increasing due to the government’s borrowing trend. Even two years ago, the interest rate on 91-day government treasury bills was less than 2.5 percent. The interest rate on short-term loans is now more than 11 percent. If the term is longer, the government has to charge more interest to take the loan. Banks now find it more profitable to lend to the government than to the private sector.
According to the data of Bangladesh Bank, the average interest rate of 91-day treasury bills in December 2021 was 2.36 percent. It has increased consistently up to 11.35 percent this month. Accordingly, the interest rate of the bill with the shortest term has increased almost five times. The interest rate on 182-day Treasury bills increased by more than 257 percent. In December 2021, the average interest rate on this treasury bill was 3.19 percent. This April, the interest rate of this six-month bill has increased to 11.40 percent. The interest rate on one year or 364 days maturity Treasury bills has increased by 234 percent. In December 2021, the interest rate of the highest term bill was 3.44 percent, but now it has increased to 11.50 percent.
In addition to interest rates, the government’s borrowing position using treasury bills has also more than doubled. According to the data of the central bank, the debt status of the government taken through treasury bills in December 2021 was Tk 62,150 crores. At the end of December 2023, the status of this loan has reached Tk 1 lakh 36 thousand 210 crores. During this period, the government’s short-term debt position increased by Tk 74,600 crore or 119 percent. Till this April, the state of the loan taken by the government has become more inflated.
Economist Dr. Ahsan H Mansoor feels, ‘The government itself is now stuck in a vicious cycle of debt. It is very difficult to get out of this cycle. He told, “Despite the revenue deficit, the government is announcing a huge budget every year. Borrowing from domestic and foreign sources to meet the budget deficit. At the moment there is no money in the currency market. Due to this, the government is forced to take loans at high interest rates. The government’s crisis will intensify due to borrowing at such a high interest rate.
Ahsan H. Mansoor said, “The government is taking short-term loans at more than 11 percent interest.” But the central bank’s policy interest rate is 8 percent. Government is now the biggest consumer of banks. In the next two months, the government will be forced to borrow another Tk 80-90 thousand crore from the banking sector. Last year the central bank gave loans to the government by printing money. That debt helped fuel the country’s inflation. Now the central bank is saying that they will not print new money. That means the amount of loan taken by the government from the market will be about one and a half lakh crore. The amount of deposits that will increase in the bank sector will go to the government’s debt.
Meanwhile, in a circular yesterday regarding ‘bank merger’, Bangladesh Bank said that the deposits deposited by individual and institutional depositors in the banks under the process of merger will be completely safe and secure. Even after the completion of the merger, the current accounts of the account holders of respective banks will continue to operate as before. In addition, the merger will be completed on the basis of the consent of the entrepreneurial directors, current board and common shareholders of the banks under the scope of the merger.

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