Even though the Bangladesh Bank has instructions on Interbank Call Money Rates or overnight loan rates, it doesn't have any instructions on short notice or term loan interest.
Taking advantage of this, the lenders who have strong liquidity reserves are consistently raising the interest rate on interbank transactions.
Earlier, Bangladesh Bank punished a few banks for making excessive profits by taking advantage of the dollar market turbulence.
Now, during the time of when there is a liquidity crunch for taka, even if the profit is earned in a similar way, the central bank still has no plan for it but cautious monitoring.
“The situation of liquidity crunch is not yet something to be worried about, but the central bank is monitoring interbank transactions very cautiously,” Bangladesh Bank spokesperson Mezbaul Haque told Dhaka Tribune on Wednesday.
Data analysis shows that, on January 10, a bank took Tk15 crore for a 14-day short-notice loan at 10% interest, which is the highest in the last six and half years.
On January 11, the highest interest rate on interbank transactions was 9.25%. A bank has taken a loan of Tk100 crore for a 90 days term loan at this interest.
Banks usually borrow money from each other in three ways – call money loan for a day, short notice loan for two to 14 days and long term loan for 90-180 days. Although the central bank has verbal instructions on call money rates, it has no say in the rates of short-notice and term loans.
However, from April 2020, the interest rate on all types of loans except credit cards has been capped at 9%.
There was no cap on interest rates other than overnight loans for interbank transactions.
Meanwhile, due to various reasons, many banks are facing a heavy liquidity crisis. Bangladesh Bank has an obligation to banks to maintain a cash reserve ratio (CRR).
As a result, the demand for interbank transactions is increasing with the interest rate widening every day.
The cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs to maintain as liquid cash.
That is why the banks in crisis are borrowing more than 9% interest from other banks.
To explain the situation, the Executive Director and Spokesperson of Bangladesh Bank Mezbaul Haque said that recently, Bangladesh Bank's repo rate and interest rate of treasury bills have all increased. Now, 91-day treasury bills interest is 7.50%, which was 6.75% earlier.
“Naturally, the other interest rates also increased slightly. On the other hand, the banks are in a liquidity crisis due to various reasons including dollar purchases and lack of deposit growth due to inflation. Interbank transactions are rising to meet that shortage and if there is excess demand, the market will go up,” he added.
“Now, Bangladesh Bank is unable to pump additional money even if it wants to because Inflation may rise again. So, we are cautiously monitoring the situation,” he further said.
Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and CEO of Brac Bank told Dhaka Tribune earlier: “As deposit growth is lower than loan growth, banks are competing for deposits, for which interest rate is rising. The same is happening with the call money rate. Due to lower liquidity, the call money rate is rising.”
However, though the interbank money market's interest rate is rising, interbank borrowing gains its traction.
On January 11, the interbank overnight transaction was 5,755.19 crore, which was Tk5,390.30 crore just a day earlier.
On January 5, the interbank overnight transaction was Tk3,423.43 crore. It was Tk3,931.24 crore on January 8 and it reached Tk4,411.34 crore on January 9.
Earlier on January 4, the overnight transaction was only Tk3,262.47 crore.