Treasury bill interest rate tops 11%

The interest rate for treasury bills that the government uses for short-term borrowing from the banking sector has hit 11%, a growth of 50 basis points in a week. 

A private bank official attributed the rise to growing demand for bank loans among state authorities.

On Sunday, the government borrowed Tk4,218 crore at 10.8% interest rate for 91 days, Tk501 crore at 11% rate for 182 days, and Tk422 crore at 11.20% rate for 364 days, as per central bank data.

In the previous auction on 26 November, interest rate for 182-day treasury bills was fixed at 10.50%.

A senior central bank official told The Business Standard that private commercial banks can get a number of benefits by investing in treasury bills and government bonds instead of lending to private borrowers.

There is no capital requirement for lending to the public sector, loans to the sector are safe as the government itself is the guarantor, and the interest rate offered is also higher, encouraging banks to prioritise lending to the government over the private sector.

Banking officials confirmed the preference for lending to the public sector as opposed to the private sector. Loans to the government are highly profitable as the interest rate for 182 day-treasury bills has surged by 375 basis points since the first week of October.

The 182 day-treasury bill is the basis for determining the Six months Moving Average Rate of Treasury bill, which in turn sets the tone for fixing interest rates for private sector loans. The growth in 182 day-treasury bill interest rate would invariably lead to rise in private borrowing costs.

Mutual Trust Bank Managing Director Syed Mahbubur Rahman said the government now needs a lot of loans and bank loans are the primary choice. The government is not worried about borrowing costs in its fund sourcing push leading to a surge in interest rates. The higher security afforded by the government makes public sector loans more preferable over private loans, he added.

Notably, banks can charge maximum 11.22% interest from private borrowers, but some issues including the risk of default forces banks to settle for lower rates.