Govt borrowing costs climb as banks demand higher yields on T-bonds

The cost of government borrowing has risen sharply as commercial banks, wary of a widening fiscal deficit and tightening liquidity, are refusing to lend to the state at lower rates.

Infograph: TBS

Today (21 April), the interest rate on 10-year Treasury bonds climbed to 10.98% during an auction in which the government borrowed Tk3,000 crore, marking a significant increase from 10.25% recorded in March.

Speaking to TBS, bankers and economists noted that the primary driver for this surge is the government's escalating reliance on the banking system to fund its operations, particularly following the formation of the new government in February.

They said the government's need for additional funds has increased because of expenditure on the Family Card programme and other projects, while revenue collection has fallen well short of the target.

According to official data, the revenue shortfall during the first nine months of the fiscal 2025-26, from July to March, stood at nearly Tk98,000 crore compared with the target, the highest on record.

With three months still remaining in the fiscal year, economists believe the overall shortfall could exceed Tk1,25,000 crore by June.

A senior Bangladesh Bank official said banks are no longer prepared to lend to the government at lower rates. "At this moment, banks will not lend cheaply to the government because the government has already borrowed outside the scheduled calendar."

He added, "It is also evident that government borrowing from banks will increase further by June. At the same time, it cannot be said that banks are holding large surplus liquidity. Therefore, whenever the government borrows, it creates pressure in the market."

Bankers said the government has already exceeded its borrowing target from the banking system.

According to Bangladesh Bank data, the government borrowed Tk1,12,761 crore from banks between July and 9 April of the current fiscal year, equivalent to 108% of its annual target.

A senior executive at a private commercial bank said banks have already anticipated that the government will continue to increase its borrowing in the coming months, leading them to demand higher returns on treasury securities.

"The central bank is currently buying dollars mainly from Islamic banks because those banks have a strong demand for funds," the executive said.

"It cannot be said that there is ample liquidity in the banking sector. Therefore, banks expect that the government will borrow more, and that is why yields on treasury bills and bonds have risen."

Impact on lending rates

The rising yields on Treasury bonds are expected to exert upward pressure on the broader interest rate regime, as these bonds serve as a benchmark for the banking sector. 

Economists believe this trend will delay any potential reduction in lending rates, despite previous indications from Bangladesh Bank Governor Md Mostaqur Rahman that rates might be lowered.

Ezazul Islam, director general of the Bangladesh Institute of Bank Management, said the government is facing an acute shortage of funds because revenue collection remains far below target.

"The government's borrowing from banks will rise further in the coming months," he said.

"Naturally, when borrowing increases, interest rates also rise. And when Treasury bond yields increase, bank lending rates will also go up."

Private sector stagnation

Private sector credit growth has remained weak despite higher government borrowing.

Bangladesh Bank data shows that growth in lending to the private sector stood at 6.03% for two consecutive months, indicating weak business activity and lower investment demand.

A senior official at a private bank said commercial banks are increasingly shifting their funds into Treasury bills and bonds because of weak demand from the private sector and the higher, risk-free returns available from government securities.

A senior Bangladesh Bank official warned that persistently high lending rates could further weaken business activity and reduce new investment.