Call money transactions increase ahead of Eid-ul-Adha

Banks and non-bank financial institutions (NBFIs) do not have to worry about a cash withdrawal spree before Eid-ul-Adha this year as they have sufficient liquidity and demand for sacrificial animals is low. 

According to the latest central bank data, banks and NBFIs on Sunday transacted Tk9,519.33 crore among them at the call money market – Tk187.46 crore higher than the transaction on Thursday. 

Though the amount is the highest in the last seven working days, it is not too high when compared to Eid-ul-Adha in previous years. 

Bankers said that before Eid every year, corporate clients need cash to pay bonuses and other allowances to employees. Moreover, depositors also come to branches for cash withdrawal as they have to buy cattle. 

To meet the immediate demand for cash, banks with a liquidity shortage go to those banks with extra cash and avail short-term loans, just for a night, with an interest rate based on demand and supply. 

In the last few years, the central bank unofficially intervened to fix the call money interest rate. Now the highest interest rate at the call money market is 5.50 percent and on Sunday, the average interest rate was 4.32 percent. 

"As banks could not lend the expected amount for the last two to three months, there is enough liquidity at hand now," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank. 

"Thus, banks have not needed to lend from the call money market so far. Only a few banks that are facing cash shortages are depending on the call money market."

On August 4 last year, banks and NBFIs transacted the highest amount of Tk8,891 crore at the call money market before Eid-ul-Adha. At that time, the highest call money rate was five percent. 

Prior to intervention by the Bangladesh Bank, the call money rate fluctuated a lot. In 2010, interest rate for call money increased to around 200 percent before Eid-ul Adha. That year, a private bank took a big amount of cash from another bank at 190 percent interest rate to meet the demand for money withdrawals. 

No such big jumps in interest rates have been observed in the banking sector since then. In 2012, the highest interest rate was 15 percent and in 2014, the rate was nine percent. In recent years, it has dropped to three to four percent on average.

The banking sector also faced huge losses in the last two to three months as they had to open bank branches amid government declared general holidays for cash transactions. The lending business of banks fell drastically during that period.

According to central bank data, private sector credit growth was 8.61 percent in June – far below the monetary target of 14.8 percent set for the last fiscal year – at a time when the banking sector is awash with excess liquidity to the tune of Tk1.39 lakh crore. 

The central bank is going to declare the monetary policy for the current 2020-21 fiscal year on Wednesday. It is likely to keep private sector credit growth projection unchanged in the policy, a Bangladesh Bank official told The Business Standard.