Rate rise invites government thumps-down on SMART mechanism by way of controlling cut-off yields on treasuries to calm money-market volatility that troubles the ease-of-doing-business ambiance, sources say.
Yields on 182-day treasuries on auction seem to be held in check to stem the tide of interest-rate rises out on the money market, officials and experts have said.
The government now seems to hold the grip of the rising interest rate in the money market with keeping the yield in 182-day treasury auctions in check, officials and experts said.
The strategy change of the government on interest regime in order to ease the business climate here becomes clear in very recent auctions of the six-month-tenure treasury bills where the auction committee only accepted bids within the target so that the cut-off yields of the treasury auctions did not increase further, according to them.
As a matter of fact, the volume of government bank borrowings through issuing 182-day T-bills declined significantly in the auctions so far this month.
The central bank from early this fiscal (FY'24) has opted for interest rate-targeting regime from monetary targeting with the introduction of reference rate called SMART (six-month moving average rate of treasuries) rate, in the process of uncapping lending and deposit rates.
And banks have fixed the lending rate by adding maximum margin of 3.50 per cent with the SMART rate. So, if the SMART rate rises, the cost of formal credits will automatically go up.
Seeking anonymity, a Bangladesh Bank official has said the cut-off yields in recent auctions of six-month treasuries declined slowly because the committee is not allowing higher bids to keep the rate under control.
According to the official, the cut-off yield in the first auction held on March 03, 2024 was 11.45 per cent, which dropped to 11.40 per cent in the auction held on March 24.
According to BB data, the government borrowed Tk 11.46 billion out of notified amount of Tk 20 billion in the first auction of this month when the cut-off yield was 11.45 per cent. Since then, the government has kept borrowing much lesser amount of funds than the notified amount from banks through 182-day T-bills.
In the following three auctions of the month (held on March 10, 14 and 24), the government planned to borrow Tk 60 billion through the risk-free investment instruments but it ended up taking only Tk 12.30 billion to avoid yield surge, the data showed.
"If the auction committee allows more funds from that segment of the treasury, it would definitely contribute to further increase in SMART rate that would be hard for the private enterprises to absorb the pressure," the central banker says.
Another BB official, who also preferred not to be quoted by name, has said the maximum bank lending rate has already surged past 14 per cent with push from rising interest-benchmark rate that jumped to 9.61 per cent for March 2024.
Nonbanks, however, jumped higher--the maximum lending rate in NBFIs crossed 15 per cent.
The massive leap in the SMART rate from the February count of 8.63 per cent becomes a matter of serious concern for the businesses. That's why the central bank recently lowered the maximum lending-rate margin by 25 basis points.
"If the SMART rate increases further, the pressure on the businesses will mount further. That's why the cautious approach is being witnessed," the BB official added.
A delegation of Bangladesh Chamber of Industries (BCI) led by its president Anwarul Alam Chowdhury Parvez recently met the BB governor when they raised concerns over growing cost of funds from banks.
Talking to the FE writer, Mr Parvez said the cost of formal credits continued to rise while the industries facing difficulties in opening LCs (letter of credit) in banks amid the ongoing forex dearth.
Simultaneously, he said, the commercial lenders have largely been making their investment in government securities riding on higher yields instead of their regular lending activities.
"And it may further squeeze the scope of getting credits by the private sector. Look at the data of private-sector credit growth, it is on the downturn," the chamber chief said about the financing dilemma.
The private-sector credit growth dropped to 9.95 per cent in January from December's count of 10.13 per cent. The growth was over 14 per cent in August 2023, the central bank data showed.
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