Dollar dash fuels local-currency crunch in banks

Pressure on local currency in banks seems rising on the cusp of major monetary changes that prompts the commercial lenders to go in desperate but cautious liquidity-boosting moves, bankers say.
Following decisions to raise policy rate, introduce crawling peg system in foreign exchange rate fixation and make interest rate market-driven, the money supply started getting squeezed on the market.
The banks' desperate hunt for liquidity under the tightening monetary regime becomes clear if the recent trend in interbank borrowing is observed. The call-money rate rose by 60 basis points to 9.22 per cent last Thursday from 8.62 per cent recorded the day before when the Bangladesh Bank (BB) made those major decisions concurrently with IMF reform push.
Seeking anonymity, a BB official has said liquidity pressure largely depends on how effectively the banks handle their local-currency management.
To mitigate the pressure of inflation and bring stability in the forex market, the central bank took the decision of raising policy rate by 50 basis points and raise exchange rate through introducing crawling-peg system by Tk 7.00 to Tk 117 per dollar, according to the official.
The central banker says the banks can meet their local-currency obligations through selling their overbought dollars on the interbank spot market while the window of cash support from the central bank against government securities is open.
"And the banks should focus more collecting deposits with recovery of non-performing assets. So, there are options to be used properly to avoid liquidity crunch," he says about the byways.
Another central banker, also preferring not to be quoted by name, says one of the major objectives of the latest regulatory measures is to contain the higher inflation through squeezing the money supply. "So, the banks need to strengthen their liquidity management to tackle the situation."
Regarding the dollar's rate rise, the official says they planned to make interbank spot market more vibrant allowing the banks to trade forex among themselves by suspending the currency-swap activities between the banks and the central bank.
"So, we're observing the interbank deals closely. We will intervene through selling and buying the greenback if needed," the central banker adds about the watch over the cusp of changes.
According to BB data on the first day's outcomes in interbank dollar trade, the day's lowest exchange rate was Tk 116.46 while the highest Tk 117.50 per dollar. The weighted average rate was Tk 117.42 per dollar.
Managing Director and Chief Executive Officer of Mutual Trust Bank PLC (MTB) Syed Mahbubur Rahman thinks the cost of deposits will go up in the current context, which could impact margin for the banks.
"I think the banks need to be very cautious in giving loans. They should not be too aggressive in the post-SMART regime," he told the FE correspondent.
A top executive of a private bank, who preferred not to be quoted by name, said the liquidity stress in banks had continued for the last several months under contractionary monetary regime prompted by belt-tightening by the government.
And the pressure had intensified further since July 2023 after the central bank skipped 'devolvement' leaving government's entire bank- borrowing requirements to the commercial banks. "Now the liquidity pressure will mount further because of the rise in repo rate and exchange rate," he said.
The experienced banker feels that the banks need to source more deposits through raising the rate, but they need to be careful because banks would lose their clients if they raise the lending rate too high.
Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh or PRI, thinks the local currency will be more attractive now as the central bank has removed the benchmark rate called SMART.
And once the taka becomes attractive, it will lead to stabilising the foreign-exchange market. "Ultimately, it brings down the rate of inflation on the economy."

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