The average call money rate, which represents the interest rate at which banks borrow from each other, has experienced a sudden surge overnight. This surge is attributed to the increased liquidity demand among commercial banks in the country.
According to data from the Bangladesh Bank (BB), the call money rate rose to 9.57% on January 23, marking its highest level since 2013. The call money rate began its sharp ascent from March 21, 2022, when it stood at 2.05%, as per the BB data, and as recently as December 2022 stood at 5.80%.
However, there was a slight slowdown observed on January 24, as the rate dipped to 9.51%. Industry insiders identified several factors contributing to this upward trend in interest rates. The economic slowdown has made it challenging for banks to recover debts from borrowers, and high inflation has eroded consumer confidence, resulting in a shortage of deposits.
On top of that, banks are grappling with a drain on their cash reserves as they acquire dollars from the central bank to address the shortage of foreign currency.
Industry experts emphasize that the increase in interest rates on loans is not uncommon under these circumstances. Nevertheless, it will have a significant impact on the profitability of banks.
Economists highlight that the escalating call money rates are casting a shadow over bank profits, putting pressure on their margins due to the surge in borrowing costs. Last week, the BB increased the policy rate, the rate at which it lends to banks and financial institutions, by 25 basis points, reaching 8%.
As the policy rate rises, the natural consequence is an increase in the cost of funds, a trend evident in the government's auction of bonds and treasury bills, according to bankers.
Now the banks that have surplus funds are showing interest in investing either in government treasury bills or going for interbank loans to get higher returns.
Data shows, on January 23, there were 61 deals where different banks borrowed Tk2,476.39 crore from their counterparts at an average interest of 9.57% calculated on an overnight basis.
The following day, on January 24, banks engaged in transactions totalling Tk3029.37 crore, borrowing at an average interest rate of 9.51%. Notably, the short notice interest rate for seven days saw an increase to 11%, up from 10.93%.
However, it's essential to recognize that banks are bound by the obligation to maintain the Cash Reserve Ratio (CRR) against their deposits. Banks often engage in overnight borrowing from one another to address asset-liability mismatches or to meet sudden fund demands.
This means that, to fulfill the CRR requirement, banks find themselves compelled to borrow at prevailing interest rates.
