The yield on government treasury bills and bonds continued to maintain a steep decline in recent months as lenders kept on a relentless pursuit of the government debt instruments in efforts to get their idle funds invested.
The interest rate on the 5-year Treasury bond, which is highly popular compared to other government debt instruments due to its maturity period, stood at 5.69 per cent this month, down from 8.86 per cent in January.
The ongoing economic meltdown is mainly responsible for the downward trend of the yield on the government debt instruments, experts said.
Good borrowers are now reluctant to take out money from banks given the existing dull state of business.
Prior to that, banks were forced to stop lending during the lockdown period ranging from March 26 to May 31.
In addition, Bangladesh Bank is now giving out stimulus funds in full swing to help the economy recover from the ongoing business slowdown.
The stimulus fund has also injected a large amount of fresh funds into the banking sector.
Against this backdrop, excess liquidity in the banking sector stood at Tk 140,730 crore as of July in contrast to Tk 105,646 crore in December.
So banks have laid emphasis on investing their excess funds on government treasury bills and bonds in order to keep their wheel of profitability turning.
On September 16, the central bank arranged an auction for the 5-year T-bond, through which the government borrowed Tk 2,000 crore. But banks submitted bids worth Tk 5,144.20 crore, revealing the lenders’ appetite for investing their funds in the government security.
The T-bonds and bills are all government-issued fixed income securities that are deemed safe and secure.
There are four types of T-bonds in Bangladesh whose maturity periods range from 2 to 20 years.
The government also rolled out three types of T-bills with maturity periods ranging from 91 days to 364 days.
By issuing the T-bills and bonds, the government borrows the funds it requires to manage the budget deficit.
The coronavirus pandemic has also slowed down implementation of the government’s development projects, which has brought down its required borrowing from the banking sources.
Between July 1 and September 14, the government borrowed only Tk 6,958 crore from the banking sector, meaning it issued a lower number of T-bills and bonds.
The government set a borrowing target of Tk 3,800 crore from the banking sources in September. But on Wednesday it took a decision to borrow only Tk 800 crore for this month.
The central bank has recently transferred to the exchequer Tk 5,300 crore, which was earned as profit by the banking regulator last fiscal year.
This has inflated the fund in the government’s account.
The surplus fund in the account stood at around Tk 11,500 crore as of September 21, which will bring relief to the government from borrowing too much funds from the banking source next month, said a central bank official.
But all banks have been making a mad rush at investing their funds in the instruments, which ended up playing a major role in the decline in the cut of yield on the tools, he said.
The declining trend on the interest rate of the government securities will put an adverse impact on banks’ profitability as lenders have little scope of lending to the private sector, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
The businesses are still in uncertainties due to the ongoing coronavirus pandemic, he said.
The lending rate will gradually decline in the days to come as banks now face a large amount of idle funds, said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of chief executives of banks.
Many banks are now disbursing loans at 7-8 per cent interest rate to continue their business, said MA Halim Chowdhury, managing director of Pubali Bank.
Banks are now mobilising deposits by offering 5.5 per cent interest rate, which has helped them bring down their cost of funds, he said.
Banks are now trying to invest their excess funds in the T-bills and bonds but the government has little demand for bank borrowing.
But Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the government would have to start borrowing within the shortest possible time.
The government borrowing will escalate once implementation of the development projects begins, he said.
The government’s borrowing increased 109 per cent year-on-year to Tk 72,246 crore in FY 2019-20, which is an all-time high for a single year.
The Repo (repurchase agreement) rate cut by the central bank has also hit the interest rate on T-bills and bonds, said Mansur, also a former high official of International Monetary Fund.
The central bank cut the repo rate 50 basis points to 4.75 per cent when it unveiled the monetary policy statement (MPS) for fiscal 2020-21 on July 29.
The latest cut, which stood at 6 per cent before the pandemic, was aimed at injecting required funds into the financial sector.
In Bangladesh, the repo rate is the central bank policy rate (CBPR), which is the rate that is used to implement or signal the monetary policy stance.
Under the repo programme, the repayment duration of the repo is between one day and 28 days as per the central bank’s regulations.
Banks should not depend on investments in government securities to ensure their profitability, Mansur said.
Banks have to start lending in the interest of their profitability that will also help the financial sector attain a turnaround in tandem, he said.