Call money market falters amid trust deficit

The call-money market's vibrancy continues to wane as trust deficit in the banking sector prompts the switch of the affluent banks' surplus funds to the state-secured standing deposit facility (SDF) despite lower gains.

Because of the switch, the volume of cash deposits in the SDF continued ballooning in recent times while transactions on the interbank market kept squeezing, causing serious concern for the banks that need short-term credits to maintain their day-to-day affairs, officials and bankers said.

They said despite higher bets offered on the call-money market, the lenders feel comfortable putting their uninvested money in the SDF or the reverse repo of the Bangladesh Bank (BB), where the rate is quite low.

As a matter of fact, the SDF turned into an investment hotcake for commercial banks in recent weeks.

According to the central bank statistics, the affluent banks kept some Tk 727.30 billion in the SDF in June this year, and the accumulated figure was 158 per cent higher than the previous month's count of Tk 282.22 billion.

On the other hand, Tk 887.90 billion was transacted on the call money market in June 2025, down by around 15 per cent from May's figure of Tk 1.04 trillion.

Seeking anonymity, a Bangladesh Bank official said the inflow of bank funds in the low-yielding SDF continued rising, which is quite surprising at a time when the demand for credit from interbank sources is too high.

The weighted average rate (WAR) on the call money market in June this year was 10.32 per cent, while the interest rate on funds deposited in the SDF was fixed at 8.50 per cent, which is the floor rate of the interest rate corridor (IRC).

"We are seeing a different picture now as banks do not feel comfortable with the call money market. Trust deficit in the current context of banking operations could be the reason," the central banker said.

He also said foreign banks in particular are showing the least interest in the call money market and instead prefer the SDF.

The central bank earlier decided to discard the 14-day repo facility for all banks and the assured liquidity support (ALS) for the primary dealer (PD) banks, but it could not implement the decision, the official further said.

"Once the decision is executed, the scope of getting funds from the central bank will squeeze, and banks' reliance on the call money market to meet their liquidity obligations will possibly increase significantly," he added.

Banks usually choose emergency loans from the call money market to fix their asset-liability mismatch, comply with the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements, and meet any exigent demand for funds.

Bankers who are struggling to maintain regular banking affairs because of the liquidity tightness said the affluent banks' tendency to put surplus credit in the SDF would undoubtedly exert pressure on the cash-hunting lenders to go for costly borrowing from the central bank through the standing liquidity facility (SLF), which would create volatility in the interest rate regime.

The treasury head of a private commercial bank, who preferred not to be named, said there are many banks that are not getting funds from interbank sources even after offering rates as high as 10.50 per cent, while the affluent ones feel comfortable keeping their uninvested credit in the SDF, where the rate is 8.50 per cent.

The fund shortage has started prompting the liquidity-tightened commercial lenders to go for costly borrowing from the central bank through the SLF, where the rate is 11.50 per cent, he said.

He also said the banking regulator needs to discourage the growing usage of the SDF immediately to make the call money market vibrant.

"If the banks' dependency on using costly funds grows, it would create volatility in the interest rate regime," he added.

In such a challenging time, the central bank should not further limit the repo facility, which would be the last nail in the coffin for the cash-hungry banks, he further said.

Managing Director and Chief Executive Officer of Mutual Trust Bank Syed Mahbubur Rahman said the operational board of each bank normally fixes the counterpart limit through which the banks lend their surplus funds to the selected banks.

"Due probably to the trust deficit considering the current state of the banking industry, the boards of many banks have squeezed the counterpart limits, which could be a reason behind the banks' least focus on the call money market," the experienced banker said.

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