Call money rate reaches over six-year high at 6.70%

Infographic: TBS

The average call money rate – the interest rate at which a bank borrows from another overnight – reached 6.70% on Thursday from the previous day's 5.77% after the central bank allowed banks to raise the rate to maximum 6.75% amid the liquidity crisis.

The new rate is the highest in six and a half years, according to the Bangladesh Bank, which has been keeping data on the call money rate since May 2016. The overnight borrowing rate remained equal or lower than the repo rate – the interest rate at which the central bank lends to other banks.

Market insiders said banks have been failing to borrow overnight at repo rate, currently 5.75%, in recent days as the liquidity crisis has worsened, causing the increase in call money rate. 

"The central bank has no guideline on the call money rate. Hence, it gave an oral instruction to increase the rate by 1% to facilitate banks' overnight borrowing," a Bangladesh Bank senior official, wishing to remain unnamed, told The Business Standard. 

Banks usually borrow money from each other in three ways – call money loan for a day, short notice loan for two to 14 days, term loan for 90-180 days. Although the central bank has verbal instructions on call money rate, it has no say for the rates of short notice and term loans.

Bangladesh Bank data says despite the increase in call money rate, the overnight bank borrowings increased to Tk3,423 crore on Thursday from Tk3,262 crore on the previous day. 

Overall, three types of bank borrowings totalled Tk4,406 crore on the day, while the interest rate for short notice loans were highest at 9% and term loans at 8.50%.

"Obviously, the increase is a good move. However, it would be better if the call money rate is made market-driven," Association of Bankers Bangladesh (ABB) Chairman and Managing director of BRAC Bank Selim RF Hussain said.

"I think the rate will increase further if the central bank does so," he told The Business Standard.

"The increase in call money rate will raise our cost of funds that ultimately will narrow down our balance sheet [or decrease loan disbursement]. Our interest income will go down as we are bound to keep lending rates under 9%," said Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank.

"Although there is no cap on consumer loans, we cannot increase interest rates there for various reasons." 

The senior banker believes that the call money rate increase is a signal of an increase in bank interest rates.  

"The previous call money rates were almost ineffective, which is why transactions were very low. If the rate is made market-driven, it would reach 8%," a treasury head of a private bank told TBS. 

Another treasury head, wishing to remain unnamed, added that banks are more interested in providing short notice and term loans rather than call money loans due mainly to a big difference in interest rates. 

"Despite the central bank's support, many banks are failing to address their liquidity crisis, which is why the inter-bank borrowing has been in an upward trend," he said and added that the new call money rate will have little significance.

According to Bangladesh Bank data, different banks have supplied nearly Tk70,000 crore to the central bank in exchange of dollars amid the greenback shortage which created the liquidity crisis. The imbalance between the growth of bank deposits and loans also contributed to the crisis. As a result, banks borrowing from the central bank has also been on the rise. 

The loan amount of the banks through repo in July this year was Tk13,619 crores, which rose to Tk16,206 crore in August, Tk29,650 crore in September, Tk79,641 crore in October and Tk61,803 crore in November.