Call money rate rising due to liquidity crisis

Banks have been facing a crisis of foreign currencies due to an increase in imports. Consequently, the banks' effort to raise foreign currencies caused a liquidity crisis, which in turn has driven up the interbank call money rate recently.

An interbank call money market is a short-term money market that allows large financial institutions, such as banks, to borrow and lend money at interbank rates.

On Tuesday, the overnight rate in the call money market was 4.70%, an increase from the previous day's rate of 4.65%, the highest in 19 months.

Earlier, from 12 August to 26 August 2020, the call money rate was 4.70-4.76%.

According to industry insiders, the flow of remittances has been low in the current fiscal year, so the banks have to buy dollars with cash to provide for the increased imports in the country. Besides, increased demand for loans from traders ahead of Ramadan and Eid has also driven the call money rate up.

State-owned banks Rupali and Janata, are among the biggest lenders in the call money market, but they themselves borrowed money from here recently. Agrani and Sonali banks also lend money to other financial institutions, but that amount is very little.

Moreover, the demand for loans in all sectors has increased, so the demand for loans at the financial institutions has also increased.

A senior official at the treasury department of a state-owned bank said due to low deposit rates of many banks, many customers are leaning towards other financial institutions. So these institutions are borrowing from the money market to balance the difference between deposits and advances.

Infographic: TBS

Mohammad Shams-Ul Islam, chief executive officer and managing director at Agrani Bank Limited, told The Business Standard that the demand of liquidity has outpaced the supply in the market. Besides, the rate of exports is much lower than the rate at which imports have increased. 

"At the same time, the flow of remittances is low. All these things have caused an increase in the call money rate," he said, adding that it will increase further on the occasion of Eid. 

Shaheen Iqbal, head of treasury of Brac Bank, told TBS that liquidity in the market is declining, because all kinds of debt is increasing.

The Bangladesh Bank is selling dollars in the market for foreign payments, as a result of which a lot of money has gone out of the market. At the same time, the government loan through the Bangladesh Bank is increasing, therefore the call money rate is increasing. 

Meanwhile, a senior central bank official said it had stopped mopping up excess liquidity to avert deepening of the crisis in the market.

On Tuesday, the Bangladesh Bank was supposed to mop up Tk1,500 crore through auction, but they cancelled it.

In addition, remittance inflows from expatriates declined after Covid-19 crisis eased, leading to a foreign currency crisis in banks through which prices for imported products are paid.

Bangladesh received $15.30 billion in remittances in the first nine months of the current fiscal year, a decrease of 17.07% compared to the same period a year ago.

The import payment rose sharply by 46.23% to $47 billion from July to January period of the current fiscal year. The interbank exchange rate hit Tk86.2 per dollar for the first time on 23 March, the Bangladesh Bank data showed.

The interbank exchange rate of the US dollar started rising in July last year due mainly to the rising import payment when the exchange rate of the greenback was Tk84.8. Economic activities also increased ahead of the upcoming Eid-ul-Fitr, putting pressure on the liquidity, said shaheen Iqbal.

The central bank withdrew money from the banking system by selling $3.73 billion as of March 23, according to the central bank's data.

Besides, the growth of private sector credit is also increasing. Private debt growth in February this year was 10.87% higher compared to the same month last year. Also in January, the growth of debt was 11.07%, which is the highest in 29 months.