The bank borrowing target envisaged in the national budget for the next fiscal year is expected to emerge as a blessing for the gloomy financial market of the country, apparently belying the apprehension that it would crowd out the private sector lending.
Financial analysts see the positive outlook as they thought it would help create demand for money to mop up the excess liquidity – subject to the government’s efficiency in utilising the money to be borrowed from the banking system in the new fiscal year starting July 1.
They say it will also facilitate banks to some extent investing their idle funds due to poor credit demand by the private sector and get some return instead, and to improve deposit rates from the present sorry state benefiting the general depositors.
According to Bangladesh Bank, the money market is now heavily awash with idle money, forcing the central bank to mop up a large amount from the market through reverse repo that costs an average daily interest of Tk1 crore.
The banking sector was burdened with surplus of over Tk1,14,000 crore after fulfilling the requirement of minimum liquid assets as of December last year.
For the last one month period, Bangladesh Bank continued to borrow around Tk10,000 crore a day at an annual interest rate of 5.25% as the idle money piled up due to sluggish private investment and sharp fall in the government’s bank borrowing in the outgoing fiscal year.
The government has set a target to borrow over Tk38,000 crore from the banking system to meet the deficit of the new budget for 2015-16.
“If the government’s borrowing target for the next fiscal year is achieved, it would be a blessing for the banks,” said Allah Malik Kazemi, change management adviser of Bangladesh Bank. “They [banks] are now more willing to invest in treasury bills and bonds than lending to private sector after the bitter experience of Hall-Mark and BASIC Bank credit scam.”
He foresees that there would be no significant change in government borrowing in the coming fiscal year.
He said although the private sector entrepreneurs are concerned about the high bank borrowing target, Bangladesh Bank’s stance is reverse. “At present the central bank is pumping out money from financial market so that excess liquidity could not create bubble in the share market and put pressure on inflation.”
The government kept closed the bond auction in May and this month as it does not need money, according to Bangladesh Bank data. Treasury bill issuing has also been reduced. As a result, the banks could not reinvest in the government instruments after maturity.
The treasury bill investment of Tk7,650 crore matured in May, against which bills of Tk1,650 crore have been issued. As a result, Bangladesh Bank has to mop up the rest Tk6,000 crore from banks through reverse repo as there was no room for extra money in the banking sector.
The government did not need to borrow money from the banking sector in the outgoing fiscal year as the selling of national savings certificates increased even beyond the target of the outgoing fiscal year.
The interest rates that ranged between 12% and 14% on saving instruments have recently been slashed down to between 11% and 13%. Still the rate is higher than the deposit rates.
As a result, the selling of savings instruments was not affected and the government borrowing target for the next fiscal year would not be a pressure for the banking sector, said Bishnu Pada Saha, general manager of Debt Management Department of Bangladesh Bank.
Bangladesh Bank did not give liquidity support to the money market through repo in the last two months as the market was awash with liquidity.
Moreover, the banks are reluctant to borrow money from Bangladesh Bank as the repo rate is higher than the call money rate that ranged between 5% and 6% in the last two months against the repo rate of 7.25%, according to the central bank data.
Contrary to the present situation, the central bank had to give liquidity support of around Tk1,00,000 crore a day to the market a couple of years ago.
The private sector credit growth remained steady within 13.5% in the past four months, which was 13.6% in April – far below the target of 15.3% set in the monetary programme.
The public sector credit growth has been consistently declining since September last year and showed negative at 3.4% in April.
The bankers, however, apprehended that the present downward trend of lending rate might rise further due to the government’s high borrowing target. The lending rate came down to 11.88% in April compared to 12.46% in December last year.
“The lending rate would rise further as the credit demand from the private sector is showing up-trend recently with the recent signs of business expansion activities,” said Ishtiaque Ahmed Chowdhury, managing director of Trust Bank.
He forecasts that banking sector would face liquidity crisis and call money rate would go up in the coming days due to the expected high borrowing.
Mutual Trust Bank Managing Director Anis A Khan said the down trend of lending rate would be affected if the government cannot increase the revenue collection, putting pressure on borrowing from the banking system.
