Banks would soon slash their interest rates on both lending and deposit due to a number of factors including the decline in call money rates.
The interest rate on call money decreased by nearly 1.0 percentage points until May 21 following suspension of auction of treasury bonds by the government.
The call money rate started falling soon after the postponement of the treasury bonds auction as the government account is now having an excess fund amounting to Tk 60 billion.
The call money rate - the interest rate at which a bank or non-banking financial institution (NBFI) provides short-term loans to other banks and NBFIs - came down to 5.25-7.25 per cent on May 21 from 6.25-8.00 per cent on May 4 last.
Besides, the government has already reduced the frequency of treasury bills (T-bills) auction which has also contributed to the increase in the liquidity pressure on the market, bankers said.
The government is set to borrow Tk 16.50 billion issuing its different T-bills by the end of this month, according to the auction calendar. It was Tk 66 billion in April last.
"We're slashing the interest rates on both lending and deposits. Such trend may continue in the coming months," Ali Reza Iftekhar, chairman of the Association of Bankers, Bangladesh (ABB), told the FE Saturday.
The overall interest rate spread between lending and deposit in the country's banking sector fell to 4.87 per cent in March last from 5.04 per cent in the previous month.
Mr. Iftekhar, also the chief executive officer and managing director of the Eastern Bank Limited, said most banks are now offering lower interest rates on lending only for priority customers who now prefer foreign currency loan from overseas sources due mainly to lower interest rate.
"The market is extremely liquid both in Taka and US dollar," the senior banker explained.
Talking to the FE, another senior official of a leading private commercial bank said the banks prefer to go to reverse REPO (repurchase agreement) auction with the Bangladesh Bank (BB) mainly due to lower demand for credit recently.
"The call money rate will stay over 5.0 per cent if the BB accepts reverse REPO auction in line with the market requirement," the private banker noted.
He also said the BB is now withdrawing liquidity on an average more than Tk 50 billion each working day at 5.25 per cent from the market using such auctions instead of Tk 10 billion a month ago.
The overall excess liquidity with the commercial banks stood at around Tk 1.07 trillion as of March 31 last but major portion of the funds has been invested in the risk-free government securities, a senior official of the BB said.
He also said excess reserve, generally known as excess over daily minimum cash reserve requirement (CRR) with the central bank, stood at Tk 32 billion.
"The amount of excess liquidity may rise in the near future if the ongoing suspension of the treasury bond auction is extended further," the central banker observed.
Currently, three T-bills are being transacted through auction to adjust the government's borrowing from the banking system. The T-bills have 91-day, 182-day and 364-day maturity periods.
Furthermore, five government bonds, with two, five, 10, 15 and 20 years' duration, are being traded in the market.
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