Thumbs-down on treasuries to bridle bank-lending rate

Government thumbs-down on the hot yields in treasuries auctions looms in a bid to hold in check rising bank-lending rates, 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 treasury bills where the auction committee only accepted bids within the target so the cut-off yields of the treasury auctions did not increase further, according to them.
If the rate in government securities rises consistently, the commercial banks would feel encouraged to invest more money in the risk-free instruments riding on the rate gains that would lead to crowding-out effect in the banking system.
On the other hand, it will become extremely difficult for the central bank to keep the lending rate within the target of 14.0 per cent. Taking all factors into consideration, the government handles the auctions of treasury bills cautiously by keeping the cut-off yields unmoved in recent trading.
According to the latest data with Bangladesh Bank (BB), the country's central bank, the cut-off yields on treasury bills for 91-day, 162-day and 364-day tenures kept rising in recent months to reach 11.65 per cent, 11.80 per cent and 12.00 per cent respectively on May 19, 2024.
Since then, auction of the three types of the T-bills have taken place twice (May 26 and June 02) but the cut-off yield remained transfixed.
Seeking anonymity, a BB official says the cut-off yields in recent auctions of T-bills remained static because the auction committee is not allowing higher bids to keep the rate under control on the money market.
"If the auction committee allows rising trend of rates in treasury bills, it would definitely contribute to further increase in deposit and lending rates that would be hard for the private enterprises to absorb," says the central banker.
Apparent afraid of an abnormal rise in lending rate following BB's recent policy shift from managed interest rate to completely market-driven rating, a delegation of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), led by its president Mahbubul Alam, met the central bank governor, Abdur Rouf Talukder, last month. The governor assured them that loan-interest rates would not exceed 14 per cent.
The FBCCI president said the cost of fund continued rising in recent times, affecting the businesses as entrepreneurs undertake a project considering the current interest rate, exchange rate and many other factors. If these change frequently, businesses face consequences.
"Thus, we have requested the central bank not to change the policies repeatedly," said the president of the country's apex chamber.
Talking to The Financial Express, managing director and chief executive officer of Dhaka Bank Emranul Huq said further increase in the rate of government treasuries would create more pressure on the lending rate.
He noted that the central bank very recently moved towards a market-driven interest regime after discarding the SMART-led arithmetic in less than a month. And interest rate in the market is still volatile.
"If the rate in T-bills continuously rises, it would put more pressure on the market. So, I think the strategy of the auction committee keeping the yield unchanged is right under the current context," the experienced banker added.
Seeking on anonymity, the treasury head of a private commercial bank said the central bank planned to keep the lending rate within 14 per cent. Keeping the plan under consideration, the maximum rate of deposit would be 11.0 per cent. But the cut-off yield in 91-day treasury bills is now 11.65 per cent.
"If the rate rises further, it will force the banks to raise the deposit rate further, which would ultimately affect the lending rate."
Simultaneously, he said, the commercial banks would feel encouraged to invest more money into the risk-free instruments on higher bets that would lead to crowding-out effect in the banking system. It would not be a good sign for the economy led by the private sector.
Bank lending to the private sector grew 9.9 per cent in April this year, a decline from the 11.28-percent growth in the same period of the previous year, according to Bangladesh Bank.
In March 2024, the private-sector credit growth stood at 10.49 per cent year on year, down from 12.03 per cent in March 2023.

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