Funds are being funneled into the banking system through increased credits under repo, liquidity support and IBLF in the regulator's bid to stem call-money-rate overshooting, sources say.
Economists, as such, raise alarm about inflation spikes as Bangladesh Bank's liquidity support to the commercial banks continues rising to a large extent that helps the central bank to keep the interbank call-money rate under the policy rate.
In their view of the higher fund flow into the market, economists say indiscriminate fund support to all banks as would create more burdens on the people in the form of further raising the inflationary pressure.
Normally, the interbank call-money rate goes up when the excess liquidity in the banking system falls. But it is not happening now as the call-money rate is hovering in between 6.20 per cent and 6.40 per cent even though the overall excess liquidity in banks is comparatively lower.
Seeking anonymity, a BB official said the central bank in July last introduced IRC (interest rate corridor) fixing an upper ceiling and floor rate, through which other rates will be moving within the corridor. The upper ceiling is called SLF or standing liquidity facility where the rate is 8.50 per cent while the floor rate or SDF (standing deposit facility) is 4.50 per cent.
"And the policy rate or REPO rate is in the middle. Our target is to keep the overnight interbank call-money market, where lending and borrowing are insecure, should move close to the repo rate, which is now 6.50 per cent," the central banker said.
As part of the policy, the central bank keeps providing financing support to the banks in accordance with their liquidity demand to keep the call-money rate under control.
"That's why it (call money rate) remains stable despite the comparatively lower stock of excess liquidity in banks," the BB official observes about the regulatory-intervention mechanism.
The commercial banks can get financial supports mainly to meet their SLR and CRR requirements from the central bank through using short-term windows like REPO, liquidity supports and Islami Bank Liquidity Facility (IBLF).
According to statistics of Bangladesh Bank, the central bank provided liquidity support amounting to Tk 633.47 billion to the banks in June 2023. The figure more than doubled to Tk 1.28 trillion in the following month.
The upward trend in handing out credit facility to the banks continues as the monthly entire volume of the liquidity supports reached Tk 1.33 trillion in August 2023.
The official data also showed that the aggregate excess liquidity of the banks amounted to Tk 1.66 trillion recorded at end of June 2023, which was Tk 2.0 trillion a year ago.
Another BB official, also preferring anonymity, says they have now been accepting all the applications of the banks that need liquidity support from the central bank.
"Earlier, we assessed overall liquidity situation of the banks that applied for the fund assistance before approving them. Now, we accepted all banks having interest to take the short-term borrowing facility," the central banker adds.
Talking to the FE, Managing Director and CEO of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman said demand for formal credits from the interbank sources keeps falling in recent times.
"As the BB continues giving liquidity support, the banks are not interested to go for borrowing from the interbank source. In fact, it is helping the banks overcome the current stress as far as their liquidity is concerned," he added.
Contacted, Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz said giving support to the banks facing difficulties to maintain regular banking operations amid liquidity dearth is understandable and logical under the current context.
"If the facility is indiscriminately given to all banks, which not desirable and may have contributed further to inflation that has already hit the common people badly," he says.
Mr Masrur has suggested that the central properly use the window in a targeted way only for the struggling lenders.
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