Cheap money chases good borrowers

Lending offer at a 7% interest rate, dangled by the head of a corporate banking division at a leading private commercial bank, has met with a refusal from several big clients as they are getting offers at a 5% rate from other private banks.

Foreign banks have been much ahead in the competition of catching borrowers by offering even cheaper financing.

This is how the lending rate cap regime has changed the pricing situation of the financial market in just a year.

A year ago, on 1 April 2020, the government enforced a 9% lending rate, aiming to help businesses get low-cost financing as well as to reduce default loans.

The effort successfully reduced lending rate but credit growth has since remained depressed – with borrowers showing reluctance to taking out loans despite getting the lowest lending rate in recent history because of the uncertainty amid the pandemic situation.

The credit growth has remained sluggish at an 8% level since then, far below the monetary target of 14.8% for June this year set by the Bangladesh Bank.

The credit growth was above 10% in 2019 when the lending rate was up to 15%.

The lending rate came down automatically owing to a huge liquidity supply against low demand, said Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank.

Some banks are offering a loan at as low as 6% for the short term, he added.

The sub-1% interbank rate has helped banks to lend at low interest rates for the short term, he said.

However, there is a risk because banks are releasing deposits and managing money from the money market. If the central bank tightens regulatory rules, excess liquidity in the banking system will dry up immediately which will push up the interest rate of the money market, he said.

Depositors are diverting money from banks, causing severe erosion of deposits, Mahbubur said.

Giving an instance of two private commercial banks, he said one has lost deposits amounting to Tk400 crore and another Tk900 crore since January last year, he added.

How banks can lend at a low rate

Soon after the single digit rate came into effect last year, banks were rushing to invest in government treasury bills and bonds. This was because yields of long term bills and bonds were above 9%, at which banks prefer investing instead of lending. High bank borrowing of the government from the banking system pushed the yield rate up.

However, the situation has changed this year as the interest rate of bills and bonds fell drastically amid the government's low borrowing.

Low demand from the government prompted the central bank to suspend the auction of long term treasury bills and bonds last month.

The interest rate of short term treasury bills and bonds came down to below 1% currently when it was above 6% last year. The interest rate of five-year bonds has also tumbled to 4% recently from above 8%, according to central bank data.

The fall in profit from treasury bills and bonds compelled banks to return to lending.

Excess liquidity started to plunge as banks started shifting money from government instruments.

The total excess liquidity, which touched a historic high of Tk2.04 lakh crore in December last year, came down to below Tk2 lakh crore in February this year.

When banks invest in treasury bills and bonds, it reflects on excess liquidity.

The government's overall borrowing from the banking system decreased by Tk6,699 crore between 1 July 2020 and 15 March 2021, which increased by Tk50,944.54 crore during the same period of the preceding fiscal year, according to data from the central bank.

"The information suggests that government borrowing from banks remained deliberately slow in the current fiscal year mainly due to rapid growth of borrowing from the non-bank sources, especially through the issuance of national savings certificates," said the Bangladesh Bank in its review report on government borrowing.

The borrowing from the non-bank sources, mostly from national saving certificates, more than doubled to Tk28,000 crore between July 2020 and January this year from Tk12,000 crore in the same period of last year.

On the other hand, the interest rate in the money market, another option to invest in, has remained below 1% for the last one year owing to the pumping of liquidity by the central bank through easing regulations amid the pandemic situation.

When investing money in treasury bonds, bills and money market causes losses, it is now a better option to lend at low cost, said a senior executive of a private commercial bank, who led the corporate business.

He said keeping money idle is a loss for banks, so they are now in the competition of offering loans at low interest rates to borrowers.

However, there is still no loan appetite in the market as investment remained sluggish amid pandemic-triggered uncertainty.

Some business groups are performing well by generating cash and adjusting their loan instead of taking fresh funds, which is causing a decline in overall exposure, he added.

Banks are now running after borrowers to lend to, he added.

As banks turned to lending, private sector credit growth saw a moderate increase by 8.93% year-on-year in February, when it was 8.32% in January, Bangladesh Bank data shows.

Global situation of interest rates

Though the interest rate in Bangladesh is now on a downtrend, the rate globally is in the opposite direction, on the back of faster economic recovery, thanks to the rapid rollout of vaccines.

According to a study of the IMF titled "How rising interest rates could affect emerging markets", the rapid vaccine rollout in the United States and passage of its $1.9 trillion fiscal stimulus package have boosted its expected economic recovery.

In anticipation, longer-term US interest rates have risen rapidly, with the rate on 10-year treasury securities going from under 1% at the start of the year to over 1.75% in mid-March.

A similar surge has occurred in the United Kingdom. In January and February, interest rates also rose somewhat in the euro area and Japan before central banks there stepped in with easier monetary policy.

Emerging and developing economies are viewing rising interest rates with trepidation. Most of them are facing a slower economic recovery than advanced economies because of longer waits for vaccines and limited space for their own fiscal stimulus.

Now, capital inflows to emerging markets have shown signs of drying up. The fear is of a repeat of the "taper tantrum" episode of 2013 when indications of an earlier-than-expected tapering of US bond purchases caused a rush of capital outflows from emerging markets, said the IMF report.

The report said good economic news in advanced economies could lead to export growth for emerging markets, and the pick-up in economic activity tends naturally to lift their domestic interest rates. The overall impact is benign for the average emerging market. However, countries that export less to the US yet rely more on external borrowing could feel financial market stress.