Liquidity crisis eases as central bank pumps in more cash 

Bangladesh Bank's efforts to ease the liquidity crisis in both the foreign exchange and local markets appear to be paying off, as money rates have started to cool down since early February after rallying for several months, shows data.

Banks' excess reserves after required cash maintenance surged to Tk11,000 crore last week, compared to only Tk2,000 crore in December of last year, according to central bank data. 

Besides, dollar liquidity has also improved, as banks' daily forex holding position increased to $3.17 billion last week, compared to a low of $1.9 billion in October of last year.

The ease in both dollar and local currency liquidity has contributed to reining in the bond and call money rates.

This was evident from investors' sentiments recently. The Bangladesh Bank on Sunday called an auction for 91-day treasury bills where the yield rate was 6.84%, down from 7.45% in January.

Banks participate in the auction to invest in bills through which the government borrows for budget expenditure. 

The yield rate for five-year treasury bonds came down to 8.20% in February from 8.29% in January, according to central bank data. 

The call money rate also cooled down to 6% in February from 7% in the previous months owing to easing liquidity. 

Preferring anonymity, a top central bank official attributed the easing liquidity stress to depositors coming back to banks and the Bangladesh Bank's increased money supply to the market through various programmes.

Following reported lending irregularities by Islami Bank, there was huge withdrawal pressure on banks in the October-December quarter.   

But depositors returned subsequently in January, said the official, adding the comeback is reflected in banks' excess reserves. 

In December, currency outside banks surged to 27% from 12% in June, which means deposits worth nearly Tk32,000 crore were withdrawn from banks in six months, according to Bangladesh Bank data. 

Though the latest "mattress money" figure is not available, bankers believe it might have reduced, thanks to deposits pouring in pushing up banks' excess reserves. 

The shortfall in cash reserve maintenance of Islami banks narrowed to Tk4,000 crore in February from Tk7,500 in December last year.

Following the Islami Bank "scams", Shariah-based banks, who once were the most affluent, faced a cash shortfall. This prompted the central bank to introduce Sukuk Bond facility, Islamic Banks Liquidity Facility (IBLF) and Mudarabah Liquidity Support (MLS) recently to support the liquidity demand. 

Infographic: TBS

In addition, the Bangladesh Bank introduced several refinancing schemes which also helped banks meet the lending demand. 

Bangladesh Bank also sped up liquidity support to banks through the repo facility which also helped ease the liquidity crisis, said a central banker. 

"The liquidity stress in the market has reduced a bit recently," said Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB).

He said plummeting call money rate usually indicates a falling appetite for cash, but market data suggests transactions have surged. 

"This is because the central bank has increased money pumping through repo. If enough cheap loans are available from the central bank, interest rates in the money market will naturally decrease," explained Hussain, who is also the CEO and managing director of Brac Bank.

Dollar liquidity improves  

Dollar liquidity increased in the banking system on the back of faster export proceeds repatriation and remittance inflow. 

The Bangladesh Bank has scaled up its monitoring of export proceeds repatriation and LC (Letter of Credit) opening to curb import expenditure. 

To scrutinise misinvoicing, a committee has been formed by the central bank to monitor the price of imported goods based on the international market. Central bank officials attributed a 22% year-on-year fall in LC opening in July-December of FY23 to the scrutiny.

This has led to banks' dollar holding position back to the pre-crisis level of above $3 billion in February. The easing greenback liquidity also helped the central bank build up the forex reserve slowly. 

The foreign exchange reserve increased slightly to $32.63 billion on 8 February from $32.22 billion on 30 January, according to the Bangladesh Bank data. 

Improvement in dollar liquidity also narrowed the trade deficit and current account gap, providing the central bank with a much needed breather.

Bangladesh's trade deficit narrowed by 21% in the first half of FY23, as the current account gap was reduced by 36%, according to the Bangladesh Bank. 

Call money market cools off 

Call money rates shoot up when the banking sector needs more cash than the supply. In contrast, the rates fall when banks sit on cash and the demand dwindles.

The overnight lending rates of the call money market show a sign of abating liquidity crunch. The central bank data show that the call money rate dipped to 6.01% on Monday after skyrocketing to a maximum of 7% on 25 January.

The rate has decreased by about 1 percentage point in the span of two weeks. Besides, transactions have also increased. Last December and January, daily borrowings in overnight loans were below Tk5,000 crore on most days. As interest rates were low, there was a short-term lending tendency on short notices.

But the transactions in February crossed Tk5,000 crore per day despite low interests. Overnight lending crossed Tk6,000 crore in the last three days. Besides, short-notice loans are also on the decline.   

Amid the liquidity crunch, bankers said they started borrowing from other banks at even 10% on short notice while the lending rate was at 9%. The central bank later intervened and set the overnight loan interest rate cap at 7%.  

Bankers said commercial banks are not willing to borrow money at high-interest rates as they have enough money supply from the central bank. As a result, most of the banks are now lending to other banks at the 6% repo rate, despite having the opportunity to charge a maximum interest of 7% in the money market.