Why interbank rates frequently hit 13% this May

Highlights 

• Call money rates stayed above 10% throughout May
• Interbank borrowing rates repeatedly hit 13%
• Weak banks relied on overnight borrowing
• Longer-term interbank lending nearly froze
• Liquidity-rich banks lent cautiously

The interbank money market usually overheats in the run-up to Eid as cash withdrawals surge. This time, however, the stress persisted throughout May.

Infograph: TBS

From the first week of the month through 24 May, Bangladesh's call money rates remained in double digits. Bangladesh Bank data showed average overnight rates hovering between 9.90% and 10.19%, while the maximum rate repeatedly touched 13%, gradually spreading across multiple maturities as the month progressed.

"The system as a whole is not completely short of cash, but liquidity is trapped within a few strong, risk-averse institutions," said the treasury head of a private commercial bank, requesting anonymity.

Cash-strapped banks, he said, are being forced to meet daily regulatory reserve requirements – Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) – at whatever punishing rate the market demands.

A spreading contagion

At the beginning of May, the 13% ceiling was largely confined to the seven-day short-notice segment on 3, 4, 6 and 7 May. But by the final week, the stress had spilled over into nine-day and 10-day maturities and even the 91-day term money market.

The term market illustrates the pressure most starkly. On 3 May, a 91-day loan averaged 11.87%. By 24 May, the same tenor reached 13% for both average and maximum rates. In less than four weeks, the cost of locking in funds for three months had risen sharply.

The data also revealed severe distortions in the yield curve. On 24 May, 10-day loans were traded flat at 13%, while 14-day money averaged a much cheaper 10.12%.

According to a treasury official, such inversions typically emerge when a borrower faces an acute and immediate liquidity crunch, forcing it to depend on high-yield secondary desks after being shunned by mainstream lenders.

Hand-to-mouth liquidity

Daily transaction volumes throughout May hovered between Tk4,000 crore and Tk6,000 crore, with up to 90% of deals concentrated in overnight borrowing. Peak overnight volumes reached Tk6,063 crore on 4 May and Tk5,827 crore on 14 May. Even on quieter days, overnight borrowing rarely fell below Tk3,200 crore.

In early May, Tk4,800-6,000 crore changed hands smoothly at an average rate of around 9.99%, indicating relatively free liquidity movement. But by mid-month, volumes dropped sharply to Tk3,264 crore on 12 May and Tk3,630 crore on 19 May – even as rates remained elevated.

"When transaction volumes fall sharply while rates stay sticky or continue rising, it usually means cash-surplus banks have shut their wallets," said a market insider. "That forces weaker banks to scramble for liquidity at any available rate."

Another treasury official said a large segment of the banking sector is now effectively surviving hand-to-mouth, returning to the interbank market every morning to roll over thousands of crores simply to meet CRR and SLR obligations.

"Instead of managing balance sheets with stable, longer-term funding, many banks are plugging daily liquidity gaps with overnight borrowing," he said.

Longer-term interbank lending has not merely slowed; it has nearly frozen, according to Bangladesh Bank data. On 24 May, the entire 91-day term market recorded just one transaction: Tk30 lakh at the maximum 13% rate.

"That is not a market. That is a distress signal," said the treasury banker.

In a healthy banking system, banks lend to one another for three to six months with relative confidence. That confidence has now evaporated. Cash-rich banks are reluctant to take counterparty risk beyond two weeks, preferring overnight or sub-14-day lending so they can withdraw funds immediately if conditions worsen.

"Banks have gone into a seven-day Eid holiday and will reopen after the month-end closing, so many institutions borrowed aggressively to maintain CRR and SLR," said another treasury official. "At the same time, banks also had to set aside additional liquidity for inward remittance payments, which increase during Eid."

Why CRR and SLR matter

Banks are required to maintain a portion of their demand and time liabilities – essentially deposits – as regulatory reserves.

Under the current rules, following Bangladesh Bank's March 2025 relaxation, banks must maintain a minimum daily CRR of 3%, and a bi-weekly average CRR of 4%.

That means a bank with Tk1 lakh crore in deposits must keep at least Tk3,000 crore with Bangladesh Bank every day, while ensuring its average reserve balance over the maintenance period remains at Tk4,000 crore.

In addition, conventional banks must maintain around 13% of liabilities as SLR, mostly through cash and government securities. Islamic banks maintain a lower ratio.

However, many weak banks have limited investments in treasury bills and bonds, making them ineligible for Bangladesh Bank's repo facility. As a result, they are left with few options other than borrowing from the interbank market at elevated rates.

The cost of the Standing Lending Facility (SLF) offered by the Bangladesh Bank has also remained high at 11.5%, further increasing funding pressure on weaker lenders.

Who lent, who borrowed?

Market insiders said the major lenders in the interbank market included relatively liquid banks such as BRAC Bank, City Bank, Eastern Bank, Mutual Trust Bank, Prime Bank, Pubali Bank, Dutch-Bangla Bank, Southeast Bank, Uttara Bank, and Bank Asia.

Many of these banks are sitting on excess deposits amid weak private-sector credit demand, which fell to a record low 4.7%. With limited lending opportunities, they have been parking surplus liquidity in government securities while channeling additional excess funds into the interbank market.

Among the major borrowers were Islami Bank Bangladesh, UCB, AB Bank, IFIC Bank, Premier Bank, and National Bank.