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Bank & Finance - January 31, 2024

Over 40 banks facing acute liquidity crisis

Mahfuja Mukul : The liquidity crisis in the banking sector is increasing day by day. This is also leading to volatility in the interbank currency market, which has further fueled the liquidity crunch. Banks are struggling to meet the increased demand for cash. Most of the banks are forced to inter-bank short-term borrowing (money market) to handle the extra pressure of cash. In that case, the interest rate is increasing regardless of the interest rate. Yesterday, Monday, the interest rate in call money was 9.65 percent. It has been reported from Bangladesh Bank that about Tk 2,500 crore were transacted in call money that day.
An official of Bangladesh Bank said that the commercial banks have recently increased borrowing money from the central bank due to cash shortage. Basically, the decline in defaults, the withdrawal of money from the market by selling dollars from reserves, the debt of the government dependent on commercial banks has intensified the liquidity crisis. In such a situation, one bank runs to another bank for a loan to deal with the crisis. At least 40 banks are borrowing from call money for cash. Many banks are collecting deposits at high interest rates to overcome the money crisis.
Analysis of Bangladesh Bank data showed that central bank has used interest rate hike as one of the weapons to reduce high inflation. In the current financial year (2023-24), the ceiling on interest rates has been removed from the beginning, which has had a direct impact on the call money market as well. Yesterday, the transaction rate in call money was 9.65 percent. Although in January 2022 the interest rate of call money was 2.72 percent. Accordingly, the average interest rate of call money has increased by 6.45 percent in two years. Economists and stakeholders have suggested that high interest rates have had a negative impact on investment and production, which may have an adverse impact on employment.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said, “Increased demand for 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 money. In this case, the interest rate is a little higher, but it can be said that it is less important.
According to the updated data of Bangladesh Bank, the interest rate of call money (Ever Night) was 9.65 percent yesterday. In January 2023, the rate was 6.74 percent. In the previous year (2022), the average interest rate of call money in January was 2.72 percent. However, the interest rate on the last working day of the outgoing year was 9.19 percent.
Policy Research Institute (PRI) executive director Ahsan H. Mansoor said, ‘money laundering, dollar’s rise in value has caused a liquidity crisis in the bank. To deal with the liquidity crisis, one bank is borrowing money from another bank at high interest rates. There is no way out.

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