The Financial Express

Foreign loan fuels bank liquidity

BB paper questions rationale of govt borrowing at higher rate through savings certificates

| Updated: October 19, 2019 11:01:44

Lankabangla and Fianancial Express Lankabangla and Fianancial Express
Picture used for illustrative purpose only Picture used for illustrative purpose only

The growth of liquidity in the country's banking system is positively linked with the change in foreign credit flow, according to a study conducted by some researchers of the Bangladesh Bank (BB).

The study also finds that the difference between real return of savings certificates rate and real bank deposit rate negatively influences liquidity in the banking sector.

Real rates of return of savings certificates and bank deposits are derived after adjusting nominal rates with inflation rates.

A working paper of the central bank - 'The implication of foreign credit and higher savings certificate rate on banks' liquidity in Bangladesh' - rigorously examined the liquidity situation in the country's banking system using different econometric tools.

The authors of the paper - Md. Bayazid Sarker, Md. Shamim Mondal, Samir Ashraf, Dr. Shamim Ara and Md. Aminur Rahman Chowdhury - are officials of the central bank.

"In our study we've found that foreign credit inflow increased the level of liquidity in the market," the authors said.

Their exercise showed that the banking system liquidity may increase by 1.87 per cent for 1.0 per cent growth in foreign credit inflow.

According to the BB statistics, total outstanding foreign credit or external debt of the country stood at US$ 55.16 billion at the end of December 2018, which was $50.31 billion at the end of December 2017. Thus net inflow of external debt stood at $4.85 billion last year.

Again, as per the exercise, if the gap between the real government savings certificate rate and the real bank deposit rate expands by 1.0 percentage point, bank liquidity may drop by 24 basis points.

"Positive real interest rate difference between savings certificate and bank deposit rates (spread) has a negative association with liquidity growth in the long run," they added.

Average yield rate of different savings certificates now stands at around 11. 40 per cent, while average bank deposit rate is 5.60 per cent.

Moreover, average yield rates of the government treasury bonds with different maturity range between 5.30 per cent and 8.40 per cent.

They also showed that call money rate has inverse association with bank liquidity. Some 1.0 percentage point increase in call money rate may reduce bank liquidity by 4.0 basis points.

"Once the established relationship between different explanatory variables and liquidity supply breaks down in the short-run, the model result found that the original relation will get back by six months," the paper observed.

"Hence, for any disruption in banks' liquidity, the government or the central bank can think about their policy support initiatives, considering a readjustment period of about six months to bring back balance," it suggested.

Though the views expressed in the paper are entirely the authors and do not reflect the official stance or view of the central bank, it has a policy implication.

Taking cue from the study result, the paper further argued that the recent foreign credit flow is widening the credit-liquidity (demand side) response.

"In addition, higher non-market responsive rate bearing the government savings certificates ultimately feed the government's borrowing without banking intermediation," it added.

The paper also opined that the government's borrowing at higher rate through the savings certificates needs to be justified to bring back expected response of market interest rate on liquidity supply-credit demand.

In this regard, as the paper suggested, a strong fiscal-monetary coordination is needed.

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