Govt's bank borrowing gets costlier as Treasury bill, bond rates hiked

The government's borrowing from the banking system has become even more expensive following an increase in the policy rate – the benchmark rate at which banks borrow from the central bank.

According to the Bangladesh Bank, interest rates surged this week by a maximum of 50 basis points for Treasury bills and 30 basis points for bonds – both tools used by the government to borrow from the banking sector.

On Sunday, the government borrowed Tk3,198 crore from banks using Treasury bills at the increased rates, data shows.

As per Bangladesh Bank data, interest rates have been increased by 25 basis points to 11.60% for 91-day Treasury bills, by 40 basis points to 11.80% for 182-day Treasury bills, and by 50 basis points to 12% for 364-day Treasury bills.

Earlier, in January this year, the central bank increased the interest rate on all types of Treasury bills by 20 basis points.

Additionally, the interest rate on the 5-year Treasury bond increased by 30 basis points on Tuesday, bringing the interest rate on this Tk3,500 crore bond to 12.40%. Previously, banks used to receive a maximum interest rate of 12.10% for purchasing such bonds.

When asked why interest rates on Treasury bills and bonds have increased, a central bank policy-making official explained that, firstly, the Bangladesh Bank increased the policy rate by 50 basis points last week. Consequently, banks have had to raise their lending and deposit rates. As a result of these factors, the impact is reflected in the interest rates of Treasury bills and bonds.

Secondly, there is currently liquidity stress in the banking sector. The amount of cash available to banks has decreased, resulting in insufficient funds for investment. Consequently, banks are unwilling to invest at low interest rates, which is reflected in the interest rates of Treasury bills and bonds.

Thirdly, banks are required to maintain a 4% Cash Reserve Ratio (CRR) today. So, they prioritised maintaining their cash flow before investing in Treasury bills and bonds, leading to an increase in interest rates.

The CRR is the minimum amount specified by the central bank that commercial banks must maintain as a reserve from public deposits with the central bank.

Speaking on the influence of the dollar rate behind the increase in government borrowing interest, the managing director of a private bank explained that banks are now required to purchase dollars at a higher official price.

"While there isn't much difference in the price of buying a dollar from remittances, purchasing a dollar from export proceeds costs Tk7-7.5 more. Therefore, banks have to invest more money to acquire dollars, which worsens the liquidity stress. This is also affecting the interest rates of government Treasury bills and bonds," he added.

Govt's interest payment to rise

Bankers and economists suggest that as interest rates on Treasury bills and bonds have increased, banks will now need to raise deposit rates, and eventually the government will have to allocate more for interest payments in the coming days.

This, they say, could result in renewed pressure to raise lending rates, further limiting borrowing opportunities for ordinary consumers.

Syed Mahbubur Rahman, managing director at Mutual Trust Bank, said, "Banks must reconsider their deposit rates due to the increase in interest rates on Treasury bills and bonds. If the interest rate on these government borrowing tools is significantly higher than the deposit rate, common people may opt to invest in these bills and bonds rather than keeping their money in the bank."

The managing director at a private bank said the government has been unable to increase revenue as per demand, leaving it with no option but to borrow from banks.

Additionally, the government is also seeking loans from abroad, although the process of securing these loans is time-consuming. Consequently, the government is increasingly relying on borrowing from commercial banks, he explained.

According to the central bank, the government's borrowing from state-owned and private commercial banks has surged in the first 10 months of the current fiscal year, reaching over Tk65,000 crore through the sale of Treasury bills and bonds.

The government had borrowed a little over Tk5,000 crore from commercial banks in the same period of the previous fiscal year, making the amount of borrowing increase by almost 12 times.

Tonmoy Modak is a Staff Correspondent at The Business Standard who covers banking and financial sector. He can be reached at [email protected]