Banks hiked interest rates on overnight loans by 25 basis points to a maximum of 7%.
The hike was verbally instructed by the central bank, managing directors of several banks told The Business Standard.
However, Bangladesh Bank Executive Director and Spokesperson Md Mezbaul Haque told TBS that he did not know about any such instruction, adding that the central bank has no role in hiking the call money market.
He said the rate is increasing due to rising liquidity demand in the market. These rates tend to be slightly upward if there is inflationary pressure, which is what is happening here, he added.
Before Tuesday, banks could lend money to other banks at a maximum rate of 6.75% as set by the central bank.
With the latest hike, the Bangladesh Bank has increased the overnight lending rate by 125 basis points in two steps this month alone.
The interest rate at which one bank lends money to another for a day is called call money rate. Banks treat loans for more than a day as short notice loans. The call money market comprises both day-long and more than a day-long loans.
Industry insiders said at the beginning of this month, banks could charge a maximum interest of 5.75% for lending money in cash.
However, because the effective interest rate of the market is high, the banks did not want to lend to other banks at such a low interest rate. They were leaning towards a high-interest short notice instead.
The central bank raised the overnight lending rate by 100 basis points to 6.75% in the first phase on 5 January.
The interest rate on short notice loans then went up to 10.50%.
In such a situation, the central bank instructed the banks not to charge more than 9% interest.
Last Tuesday, the central bank directed the banks to take the overnight interest rate up to 7%.
According to the money rate data available on the central bank's website from May 2, 2016, overnight loans have not seen such a high rate in more than six-and-a-half years.
Most of the days in the month of December saw lending below Tk3,000 crore in the overnight money market.
However, transactions picked up in the month of January due to the central bank's instructions to increase the interest rate.
On some days, borrowing crossed Tk5,000 crore.
Generally, when interest rates rise, the propensity to borrow decreases. But in the case of overnight transactions, the opposite holds true. As interest rates rose, so did debt.
On Wednesday, banks disbursed overnight loans of Tk4,420 crore at an average interest rate of 7%.
The average interest rate for short notice loans ranged from 7.50% to 8.25%.
For a 14-day short notice loan, the average rate was only 5.86%, which is the only exception.
The heads of the treasury departments of several banks said many of them agreed to lend at low interest rates to each other, so they believed that such an exception could have been made for a 14-day short notice loan.
An official of the treasury department of a state-owned bank told The Business Standard that usually if the liquidity of state-owned banks is high, the lending rate is also low.
State-owned banks have regularly provided overnight loans from 2017 to 2020, even when the interest rate was 0.10%.
Most of the state-owned banks are under some stress due to the almost daily purchase of dollars from the central bank to meet the payment of the import of daily necessities, prompting overnight loans, the official said.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank Limited, told TBS, the cost of funds – how much banks and financial institutions spend in order to acquire money to lend to their customers – of banks will increase due to this rate increase.
He, however, said that the central bank's move was a signal to banks to increase interest rates.
Saying that the 9% cap on loans should be relaxed or removed, an experienced banker said, "We are trying to increase the amount of deposits by increasing the interest rate on those. But since there is a cap on loans, it is difficult for us to increase it by much."