BB not sticking to its words
Bangladesh Bank yesterday showed little interest in mopping up excess liquidity from the banking system as it withdrew only 38 per cent of funds attracted from banks through an absorbent instrument.
Some 21 banks placed bids worth Tk 6,875 crore at the Bangladesh Bank auctions for BB Bill, which was relaunched yesterday after more than three years.
On August 5, the central bank said it would revive the BB Bill, an instrument that was last used in March 2018 to keep the money market stable.
Analysts said the central bank's stance contradicted its previous declaration that it would absorb the excess money.
On top of that, this has given a negative signal to banks, which will discourage them from taking part in the auctions in the days ahead.
The central bank mopped up Tk 2,605 crore as a good number of banks shied away from investing their funds at low rates quoted by the BB.
Auctions of two kinds of the BB Bill -- one of a 7 day period and another of 14 days -- were held yesterday, where the cut of yield of the former was fixed at 0.52 per cent and the latter 0.75 per cent.
Banks, however, offered a maximum interest rate of 2.97 per cent but the central bank did not accept the rate. Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the BB should have accepted all bids placed by the banks in the interest of the financial sector.
The central bank could have even offered a higher rate than what it had fixed yesterday to mop up the excess funds, he said.
Drawing in the excess fund is the best way to push up the interest rate on deposits at this moment, Mansur said.
The excess liquidity in the banking system stood at Tk 231,462 crore as of June, up 66 per cent year-on-year and 9 per cent from that a month ago.
The surplus fund has been maintaining an upward trend since March last year after the central bank took several measures to inject money into the market to offset the business slowdown brought on by the coronavirus pandemic.
Mansur also criticised the central bank's stance, saying that fixing the interest rate on deposits in context to inflation was not a solution as it opposed the ideal system of the open market economy.
The BB on August 8 asked banks not to set interest rates on fixed term deposits below the inflation rate in order to protect depositors from negative returns.
The weighted average interest rate on deposits stood at 4.13 per cent in June while the average inflation rate was 5.56 per cent, showed data from Bangladesh Bank and the Bangladesh Bureau of Statistics.
As a result, depositors are facing a negative return on savings, discouraging people from parking their savings in banks.
But banks with good performance records may not receive deposits on offering such high interest rates, Mansur said.
Against this backdrop, depositors may be prompted to invest their funds in risky zones like the capital market or the informal financial sector to enjoy a better rate, he said.
The latest central bank notice will create a distortion in the financial sector, weakening the interest of depositors, he said.
He urge the central bank to speed up its ongoing money withdrawal process, even if it required offering a high yield rate.
The BB officials, who are working on controlling the liquidityin the market, said decisions on such issues were usually taken by the central bank high-ups.
They said the BB should allow banks to invest their funds in the BB Bill by way of increasing the cut of yield on the instrument, otherwise the main goal of withdrawing money from lenders would not be fulfilled.
Md Arfan Ali, managing director of Bank Asia, said the BB Bill was a monetary tool, whose main purpose was to keep the financial sector stable.
But the rates offered by the central bank at yesterday's auction were too low, which may discourage lenders from taking part in the process in the coming days, he said.
A total of nine auctions for the BB Bill will be organised throughout this month.
"Banks have to provide an interest rate on deposits based on the inflation rate. But the rate offered by the central bank at the auction is not comfortable for banks," Ali said.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said many banks were now observing the auctions of the BB Bill.
He said banks would feel comfort if the cut of yield of the instrument went up.
On the decision for inflation-based fixing of deposit interest, he said the central bank should have first observed the market for at least one month after reintroducing the BB Bill.