The call money rate declined to a record low. The rate fell to 3.5% in July this year.
This is an indication that the market is flush with liquidity with hardly any demand for credit.
Data shows the weighted average call money rate was 8.16% in 1997, which came down to 7.37% in 2007.
The call money rate is the rate at which banks lend overnight money to each other to fill the asset liability mismatch or to meet sudden demand for funds. The market was introduced in the country in the early 1980s.
The demand and supply of liquidity affect the call money rate: a tight liquidity condition leads to an increase in the call money rate and excess funds push the rate down.
Heavy government borrowing from the public via savings instruments, which are much higher yielding schemes, is a major reason for the banking sector’s excess liquidity, said Anis A Khan, managing director of Mutual Trust Bank.
“Thus, the government does not need to borrow as much from the banks anymore — its borrowing from the banking system has plummeted to a historical low in the last few years.”
Banks are relying on the Bangladesh Bank Bills, which yield less than 3 percent in interest rate, to invest their money.
In the last six months, the central bank took back Tk 24,000 crore through the system to minimize the growing liquidity in the market.
When there is surplus liquidity in the system, the call money rate tends to move closer to the fixed reverse repo rate.
The reverse repo rate, which tends to be somewhat conservative in Bangladesh, yields more than the overnight money market.
The interest rate on reverse repo has remained unchanged at 5.25% since February 2013.
Reverse repo is the rate at which banks park their excess funds with the BB — the last option when no other avenues are available for investing excess money.
But the BB did not accept any bid for reverse repo since November last year.
The net sale of different savings schemes rose to about Tk 33,689 crore, which was the highest in the country’s history, against a government target of Tk 15,000 crore for fiscal 2015-16.
Investors were lured in by interest rates as high as 5 percentage points more than those offered by commercial banks on term deposits.
On the other hand, the government borrowed only around Tk 4,000 crore from the banking system against a target of Tk 38,523 crore for fiscal 2015-16.
Though the central bank recently imposed restrictions on foreign loans, entrepreneurs have availed over $8 billion in loans from foreign sources between 2012 and 2015.
Source:The Daily Ittefaq
