Banks’ zeal for govt debt instruments decreasing interest rate
The yield on government treasury bills and bonds continued to keep a steep decline lately as lenders continued a relentless quest for the federal government debt instruments in efforts to obtain idle funds invested.
The interest on the 5-year Treasury bond, which is very popular compared to other government debt instruments because of its maturity period, stood at 5.69 per cent this month, down from 8.86 % in January.
The ongoing monetary meltdown is mainly in charge of the downward trend of the yield on the government debt instruments, authorities said.
Good borrowers are actually reluctant to obtain money from banks given the existing dull state of business.
Prior to that, banks were forced to stop lending during the lockdown period which range from March 26 to May 31.
Furthermore, Bangladesh Bank is currently offering stimulus funds in full swing to greatly help the economy get over the ongoing business slowdown.
The stimulus fund in addition has injected a sizable amount of fresh funds in to the banking sector.
From this backdrop, excess liquidity in the banking sector stood at Tk 140,730 crore by July as opposed to Tk 105,646 crore in December.
So banks have laid focus on investing their excess funds on government treasury bills and bonds in order to keep their wheel of profitability turning.
On September 16, the central bank arranged an auction for the 5-year T-bond, through which the federal government borrowed Tk 2,000 crore. But banks submitted bids worth Tk 5,144.20 crore, revealing the lenders' appetite for investing their funds in the federal government security.
The T-bonds and bills are all government-issued fixed income securities that are deemed safe and sound.
There are four types of T-bonds in Bangladesh whose maturity periods range from 2 to twenty years.
The federal government also rolled out three types of T-bills with maturity periods which range from 91 days to 364 days.
By issuing the T-bills and bonds, the federal government borrows the funds it needs to control the budget deficit.
The coronavirus pandemic has also slowed up implementation of the government's development projects, which includes brought down its required borrowing from the banking sources.
Between July 1 and September 14, the federal government borrowed only Tk 6,958 crore from the banking sector, meaning it issued less number of T-bills and bonds.
The federal government set a borrowing target of Tk 3,800 crore from the banking sources in September. But on Wednesday it took a decision to borrow only Tk 800 crore because of this month.
The central bank has used in the exchequer Tk 5,300 crore, that was earned as gain the banking regulator last fiscal year.
This has inflated the fund in the government's account.
The surplus fund in the account stood at around Tk 11,500 crore by September 21, that will bring relief to the government from borrowing an excessive amount of funds from the banking source the following month, said a central bank official.
But all banks have already been making a mad rush at investing their funds in the instruments, which finished up playing a significant role in the decline in the cut of yield on the various tools, he said.
The declining trend on the interest rate of the government securities will put an adverse effect on banks' profitability as lenders have little scope of lending to the private sector, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
The businesses are still in uncertainties as a result of ongoing coronavirus pandemic, he said.
The lending rate will slowly but surely decline in the times to come as banks now face a sizable amount of idle funds, said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of chief executives of banks.
Many banks are actually disbursing loans at 7-8 % interest rate to keep their business, said MA Halim Chowdhury, managing director of Pubali Bank.
Banks are actually mobilising deposits by offering 5.5 % interest rate, which includes helped them bring down their cost of funds, he said.
Banks are actually trying to get their excess funds in the T-bills and bonds however the government has little demand for bank borrowing.
But Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the federal government would have to begin borrowing within the shortest possible time.
The government borrowing will escalate once implementation of the development projects begins, he said.
The government's borrowing increased 109 % year-on-year to Tk 72,246 crore in FY 2019-20, which is an all-time high for an individual year.
The Repo (repurchase agreement) rate cut by the central bank in addition has hit the interest rate on T-bills and bonds, said Mansur, also a former high official of International Monetary Fund.
The central bank slice the repo rate 50 basis points to 4.75 % when it unveiled the monetary policy statement (MPS) for fiscal 2020-21 on July 29.
The latest cut, which stood at 6 % before the pandemic, was targeted at injecting required funds in to the financial sector.
In Bangladesh, the repo rate may be the central bank policy rate (CBPR), which may be the rate that can be used to implement or signal the monetary policy stance.
Beneath the repo programme, the repayment duration of the repo is between one day and 28 days according to the central bank's regulations.
Banks should not rely upon investments in government securities to make sure their profitability, Mansur said.
Banks have to start out lending in the interest of their profitability that will also help the financial sector attain a turnaround in tandem, he said.
