The Bangladesh Bank (BB)-implemented interest rate corridor (IRC) comes under extreme pressure as call-money rate goes past the upper ceiling of the corridor, officials and bankers said Monday.
It means the passageway of the interest rate is not working specially in the current context of banking operations when the liquidity pressure on the banking sector continues mounting, according to them.
The central bank, as part of its monetary-policy-modernisation framework, launched the IRC starting from the ongoing financial year (FY'24) by fixing a floor rate and upper ceiling. And the call-money rate should move within the corridor confines.
But things move completely reverse as the call-money rate is observed breaching the IRC for the last two days, in a matter of concern to the banking regulator.
According to the latest statistics with the central bank, the average interest rate charged on overnight loan by one bank to another stood at 9.56 per cent on January 29, 2024. On the previous day, it was 9.60 per cent.
There were 54 bids amounting to Tk 23.32 billion on Monday. Many banks borrowed at 10 per cent while some at 8.00, averaging at 9.56 per cent, the data showed.
Banks lend overnight money to one another to fill the asset-liability mismatch like SLR and CRR or to meet sudden demand for funds.
Seeking anonymity, a BB official says they have been observing recent breaching of the corridor barriers, which is a matter of concern.
A few banks, including a liquidity-hungry state-owned one, are found involved in violation of the rate, the central banker says.
"We (BB) have taken the issue very seriously and will inspect the situation thoroughly," the official says about the bending of rules.
Responding to a question, the central banker said there are options available with the BB through which the commercial lenders can get liquidity support against their collateral - treasury bills and bonds.
"The banks might run out of securities. That's probably the reason behind getting funds breaching the IRC. Such breach might happen in time of severe liquidity crunch. But, we'll address it," according to the official.
About the measures by the central bank, the official said they would issue warning to the banks involved in the wrongdoings and streamline it.
Also on condition of anonymity, a top executive of a private commercial bank says the liquidity situation for some banks turns too severe to compel them to breach the corridor because some might run out of the collateral-a precondition for getting credits from the regulator.
"It's really concerning for the industry. The central bank should immediately sit with each of the banks to address the liquidity crisis and take action plan accordingly," he says.
Contacted, former lead economist of World Bank's Dhaka office Dr Zahid Hussain said the central bank ought to reassess the existing structure of the IRC, which is not working to keep the call-money rate under check amid the ongoing liquidity stress.
Citing the current half-yearly monetary policy statement, he noted that the BB slashed down the SLF (standing liquidity facility), the upper ceiling of the IRC, by 25 basis points to 9.50 per cent. "It also needs to be examined whether the decision is appropriate."
The eminent economist mentions that there are banks facing chronic liquidity problem, not the temporary ones, in absence of corporate governance.
Unconditional liquidity support by the BB to keep the banks operational will not give any solution at all. "A special plan of actions is required to force the banks concerned to ensure compliance," he says.
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