The tale of the excess liquidity in Bangladesh’s banking sector does not paint the true picture as the majority of the additional fund is concentrated to a few lenders.
The surplus fund totaled Tk 220,880 crore in October, surprisingly up from 0.6 per cent the month before at a time when concerns about a cash stress have surfaced.
Of the total excess fund, Tk 168,508 crore is concentrated to only a dozen of banks, accounting for 76 per cent of the additional liquidity, as some of them are preferring parking funds in securities instead of channeling money to the real economy in the form of loans.
The fund concentration has created a liquidity stress in the sector as most lenders are struggling to meet a sudden spike in demand for credits just after the reopening of the economy from the coronavirus pandemic.
Still, the central bank is following a “contradictory stance” by simultaneously arranging auctions of both repo (repurchase agreement) and Bangladesh Bank Bill, worsening the situation, bankers say.
Up until August this year, the auction of the BB Bill had been suspended.
But the Bangladesh Bank has been mopping up excess liquidity since August 9 by reviving the Bill, allowing banks to invest their idle funds through the purchase of the securities under the instrument.
The latest BB Bill auction took place on November 18 when the central bank mopped up Tk 150 crore. As of Thursday, Tk 10,226 crore was invested in the bill following maturities of a portion of the investments.
But the continuation of the BB Bill auction has raised questions as the liquidity situation has completely changed.
In order to ease the liquidity pressure facing some banks, the central bank has started to inject money into the financial sector through repo auction after a long pause.
Repo is a window of a central bank through which the banking regulator injects funds into the market. The interest rate on the repo is 4.75 per cent in Bangladesh.
“It is a contradictory stance of the BB. It is illogical to mop up funds from banks and inject them simultaneously,” said a BB official, wishing not to be named as he is not authorised to speak to the media.
The liquidity shortage has forced the cash-poor banks to desperately turn to the inter-bank call money market, sending the interest rate on the overnight borrowing to an elevated level.
The call money rate stood at 4.49 per cent on November 18, up from 2.25 per cent on October 31.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says that the central bank should put on hold the BB Bill auction for the time being as many banks do not have enough cash.
“The call money rate will go up further if the central bank keeps holding BB Bill auctions.”
The central banker says the banks that are sitting on the surplus funds are the lenders in the call money market. The 12 banks are Sonali, Islami Bank, Agrani, Janata, Standard Chartered, Pubali, Dutch-Bangla, Rupali, Southeast, Trust, Bank Asia, and Jamuna Bank.
Four state-owned commercial banks held an excess fund of Tk 97,130 crore, or 44 per cent of the total.
Banks are simultaneously investing in the call money market and the BB Bill. But if the auction of the BB bill discontinues, the funds would go to the call money market, easing pressures, said the central banker.
Mohammad Shams-Ul Islam, managing director of Agrani Bank, said that they were investing in the BB Bills and the call money market on a regular basis.
The lender’s excess liquidity stood at Tk 22,455 crore on October 31.
Islam, however, said that the bank was now lending to small and medium enterprises to reduce its surplus fund.
Golam Awlia, managing director of NRB Commercial Bank, called for the suspension of the BB Bill auction.
“The liquidity situation is not congenial for banks now. If the auction of the BB Bill is stopped, the banks with the surplus funds will invest in the call money market,” he said.
Md Arfan Ali, managing director of Bank Asia, hopes the call money market will be stable in the days to come.
MTB’s Rahman also pointed to the surging imports for the deepening of the liquidity stress as some banks were compelled to buy US dollars regularly to cater to their clients.
The purchase of the greenback has dried up the supply of the taka. The central bank has sold US dollars to the tune of $1.82 billion so far this fiscal year.
Rahman predicts that the interest rate on deposits would increase in the quickest possible time – a development that will put pressure on the lending rate.
Many banks are mobilising fixed deposits at 6 per cent in contrast to 2-3 per cent three to four months earlier.