Economists warn of adverse impacts on investment
The inter-bank call money rate on Wednesday skyrocketed to 175 per cent as banks and non-banking financial institutes scampered to submit cash to the Bangladesh Bank to fulfil their cash-reserve ratio.
Economists warned that the economy would be affected severely if such volatility in call money rate continued.
Banking sources said the call money rate or interest rate that banks charged from other banks for short-term borrowings went up to 90 per cent in the banking sector on Wednesday while it soared to 175 per cent in the NBFI sector with deadline set by the central bank ending on the day.
Banks had to take loans at a higher interest rate from other banks, mainly the nationalised ones, as they were facing a liquidity shortage to meet the BB’s requirement.
According to bankers, the call money rate usually goes up to 20 per cent before the Eid-ul-Azha because of heavy withdrawal of funds by the clients to purchase rawhides of sacrificial animals.
But, the central bank’s directive to the banks and the NBFIs to increase their statutory liquidity ratio, or SLR, to 19 per cent from 18.5 per cent and cash-reserve ratio, or CRR, to 6 per cent from 5.5 per cent by Wednesday made the money market highly volatile.
The call money rate went up to an exorbitant level on Wednesday as banks that have liquidity crisis had to take loans to meet the central bank’s requirement, said a top official of a private commercial bank.
He said he had never heard in his banking career that the call money rate had gone so high ever before.
He said the central bank should have imposed a ceiling on the call money rate so that banks with excess liquidity could not charge any exorbitant amount.
The Bangladesh Bank on Wednesday lent primary dealer banks around Tk 2,155 crore through Repo, or sales and purchase agreement, but the fund proved to be inadequate. The central bank had lent them Tk 1,147 crore on Tuesday and more than Tk 1,677 crore on Sunday and Monday.
Wednesday saw inter-bank transactions of Tk 3,899 crore.
Eastern Bank Limited managing director and chief executive officer Ali Reza Iftekhar told New Age that the liquidity shortage aggravated as the central bank was not giving any Repo for banks and the NBFIs.
The central bank, on the other hand, withdrew around Tk 3,000 crore from the money market through treasury bills a few days back.
‘The banking sector had to submit around Tk 3,000 crore for maintaining CRR with the central bank. The banks had to borrow money to submit this huge amount of fund by the deadline set at Wednesday,’ he said.
The call money rate has gone unusually high in the past few days, observed Bangladesh Institute of Development Studies director general Mustafa K Mujeri, also the former chief economist of the central bank.
‘The Bangladesh Bank’s rate hike has prompted banks to scamper for liquidity. Besides, the import has peaked up, creating huge demand for money,’ he told New Age.
He warned that if the volatility persisted in short-term lending, the economy would be affected as the cost of fund would increase.
‘Bankers are buying money at a high rate. They may increase the interest rate on deposit for accumulating funds. Then they will increase lending interest rate. The impacts of lending rate hike will affect the investment sector,’ Mujeri explained.
He said if the cost of fund increased, the cost of business would be higher.
The central bank should immediately devise an action plan to defuse the volatile situation, he added.
Economists said the central bank had hiked the SLR and CRR to control inflation by squeezing money. ‘But there is this question – whether the current state of inflation could be brought down by increasing SLR and CRR,’ said an economist.
