The huge excess liquidity is an atom bomb for the money market as a major portion of it remains invested in high yield government bonds, which discourages banks to go for lending in the private sector.
When lending rates increase with rising demand after economic activities rebound, high bond holdings will create liquidity crises in the market.
Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, made the observation during an interview with the Business Standard recently.
He said the government borrows money from banks through bonds. Banks are supposed to offload those bonds for the public to create a secondary market. But, banks are holding high yield bonds at over 8% to 9% interest rate to avail safe return.
This is the right time to sell these bonds to the public as the deposit rate is less than 1%. High yield bonds will attract the public in investing, which will be a good opportunity to create awareness among the general public in bond investment, he said.
Banks are flooded with excess liquidity after having made a record Tk1.95 lakh crore in November 2020, according to Bangladesh Bank data.
The excess cash will raise banks' costs to safeguard their customers' money.
Excess liquid assets refer to the liquid assets of the banks after maintaining their CRR (Cash Reserve Ratio) and statutory liquidity ratio (SLR).
When the call money market came down to less than 1%, lending rate capped to 9%, banks diverted their investment to bonds as interest rate on bonds moved to above 9% in the last year, said Ahmed.
However, the interest rate on long term bonds came down to 4% recently due to huge money flow to bonds, he said.
He termed banks' investment in bonds as inefficiency in money management.
He said only primary dealers appointed by the government are supposed to buy bonds. The government will borrow money through only primary dealers. But recently, all banks were allowed to participate in bond auctions, resulting in pilling up of excess liquidity.
On the other hand, bond rate came down to 4% level due to excess money flow, when the interest rate for saving instruments is still above 11%.
If yield from bonds remains low, the secondary bond market will never be created as the public will invest in savings instruments instead of bonds. Moreover, in the last budget, 5% source tax was imposed on bond yield, which is another barrier to creating a secondary bond market.
The government should change its policy to attract individual investors for bond investment.
He suggested that the government should purchase bonds only through primary dealers and keep the rate above the deposit rate and lower the savings instrument. As a result, the government can save costs by borrowing money through bonds instead of saving instruments. On the other hand, people will buy bonds from the secondary market due to higher returns than bank deposits. At the same time, the 5% tax should be lifted to lure retail investors into bonds.
Moreover, when banks, except primary dealers, will be restricted from investing into bonds, they will go to the private sector to lend, he said.
He said currently, private sector credit growth is depressed and one of the reasons behind is banks' bond holdings.
He said banks are still holding high yield bonds above an interest rate of 9%. This is the right time to offload bonds to the public as the deposit rate is low now. So, if bonds are sold to the public they will get a higher interest rate then deposit rate, which will create awareness among people about the secondary bond market.
Jamuna Bank has been working as a primary dealer of bond purchasing for the government since the year 2003 and selling bonds to the OTC (Over The Counter) market in an effort to develop the secondary market.
Explaining how primary dealers work, he said that they purchased bonds according to the government budgetary target of bank borrowing. If the government borrows less than the target, the rest of money is devolved upon dealers. If borrowing is more than the target, then bond yield goes up.
The primary dealers collect money for the government by selling bonds to the OTC market.
The bank has a portfolio of bonds worth Tk 18,000 crore and it was recognized as best primary dealer 24 times in the last 10 years by the Bangladesh Bank for its contribution in developing the secondary bond market.
Moreover, every quarter, the bank gets an award of Tk 30 lakh from the Bangladesh Bank for contributing in secondary bond market development, said Ahmed.
The annual bond trading of the bank is Tk 30 lakh crore to Tk 40 lakh crore from which it earns a big amount of commission.
A major portion of profit of Jamuan Bank comes from bond trading. As a result, the bank's exposure in lending is moderate.
The bond trading kept the bank's profit growth stable at 20% in the last five years.
The bank is now planning to expand banking activities across the country through sub-branch and agent banking.
In the last year, the bank made an operating profit of Tk 637 crore and this year it has a target to improve it to Tk 750 crore, said Ahmed.
In his 35 years of banking career, Ahmed spent 20 years in the Jamuna Bank.
He addressed two big challenges for the bank in the new year. One is finding good borrowers and another is recovering loans due to prolonged corona impact.
The bank has moved to invest in digitalization to cope up with the new normal situation. The bank will spend Tk 20 crore for purchasing software for home banking.