Cenbank expedites liquidity support for banks ahead of Eid
Yet, call money rate hits a two-and-a-half month high of 6.19% on Tuesday amid rushes for cash withdrawal
The Bangladesh Bank has increased liquidity support to banks through the short-term repurchase agreement, widely known as repo, so that they can manage liquidity stress amid rushes for cash withdrawal ahead of Eid-ul-Fitr.
The amount of outstanding repo loans jumped to Tk19,828 crore on 16 April, according to the latest central bank data, which was just Tk10,880 crore on 9 April.
Commercial banks borrowed the money from the central bank against their treasury bills or bonds for 1-14 days at 6.1-6.2% interest rates to meet their fund shortage.
Besides, their borrowings from each other, which is known as the call money market, have also been on the rise for the last couple of days. On Tuesday, the call money rate reached 6.19%.
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"The demand for money at banks naturally increases during Eid. The central bank supports the banks with repo borrowings to keep a good flow of cash at such times," a senior Bangladesh Bank official, wishing to remain unnamed, told The Business Standard.
Banks sought higher amounts of funds for several weeks until Monday, which decreased a bit on Tuesday, he noted and added that although repo borrowings are available for 1-14 days, some banks borrowed for 14 days considering Eid vacations and their convenience.
Several private bank officials told TBS that the demand for cash increases ahead of Eid as people's spending increases largely for shopping. To manage the pressure, some banks struggle and borrow from others. This time, three state-owned banks and several Islamic banks are under severe liquidity stress and they have borrowed the most. Many other banks are in good condition with the support of the central bank, they added.
Highest call money rate in 2.5 months
Even though the central bank increased liquidity support through repo, banks also increased borrowing among each other in the past two weeks due to the high demand for cash. As a result, the call money rate – the interest rate at which one bank borrows money from another overnight – reached a two-and-a-half-month high of 6.19% on Tuesday.
On the day, call money borrowings, 2-14 days short notice and term loans among banks amounted to Tk7,128 crore, with the dominance of short-notice borrowings – Tk3,932 crore.
Insiders said banks having surplus liquidity are more interested in lending on short notice rather than overnight on the call money market because of higher interest rates – which was the highest at 9% on Tuesday.
"The central bank has been increasing liquidity support in the form of repo loans to banks since the beginning of February, which helped fall in call money rate. The rate was 7% on 25 January and levelled at 6% for the last two and a half months. The cash withdrawal pressure increased the rate again on Tuesday," a senior Bangladesh Bank official explained.
