Skip to main content

Understanding Interest Rate in Bangladesh Market

By

Here I will be trying to connect the dots to see where things can be placed and how some events were unfolded. Now, I will tell you to consider it as a drill where I will be trying to refresh my own thoughts and understanding. In the future I want to look back and see what I missed and why I missed them. I will keep it as a story moving in a linear time. I am considering the timeline when I have actively followed the market. In retrospect, everything seems to connect but back then I couldn’t quite gauge the extent of everything that was about to be followed. Probably, in some cases, I did understand the direction the market was following but my personal investing strategy would tell you otherwise. There were lots of biases in place and more importantly I was someone who just started out and was confronting all the emotional roller coaster I put myself in. I am still figuring out ways to stick to my strategy and tackling the emotional upheaval I face every now and then depending on how the market reacts.

In 2017, we saw equity market of Bangladesh, represented by DSEX, posting 24.0% return. Reasonable earnings growth of most companies, high private sector credit growth indicating accelerated economic activity and low interest rate led to such stellar return of the market. Here are few tidbits of the then macro-economic scenario:

  • By end of 2017, private sector credit growth was hovering around 17.0%-19.0%. To put it in perspective, Bangladesh’s nominal GDP growth was around 13.0%-14.0%. In this regard, private credit growth was pretty high.
  • Low interest rate also magnified businesses’ and individuals’ appetite for loan. So, there was high demand for credit.
  • Inflationary pressure was evident. Inflation crossed 6.0% during the last quarter of 2017 and was crawling up.
  • Meanwhile, aggressive lending by banks also put their asset quality at risk. And most banks were touching or crossing the threshold of ADR (Advance-Deposit Ratio) limit which was 85.0% for conventional banks back then.
  • Sluggish performance in export and remittance also fueled the current account deficit. You would find the current account deficit at USD 9.6 billion by end of FY (Fiscal Year) 2018 compared to USD 1.3 billion by end of FY17.
  • Higher current account deficit meant that foreign currency outflow compared to inflow was much higher. So, there was depreciation pressure on BDT, the local currency. Central bank wants it to stay stable.
  • Since there was higher demand for USD (foreign currency), Bangladesh Bank would sell foreign currency (increasing the supply of foreign currency) to local banks to keep the exchange rate stable. In result, the action mopped up some liquidity from the system (central bank selling USD in exchange of equivalent amount of BDT from Banks).

So, you can understand that the economy was getting out of balance. Some intervention was required. Central Bank’s main concern is to ensure price stability. Since, high private sector credit growth started putting inflationary pressure, Central bank of Bangladesh, BB (Bangladesh Bank), prepared recipe for limiting the credit growth. And in the beginning of year 2018, BB revised down the limit on ADR to 83.5% from 85.0% for conventional banks. It implied any bank could give out up to BDT 83.5 as loans out of their deposit of BDT 100.0. Earlier it was BDT 85.0. And most banks were already at a threshold point of the previous ADR limit.

So, now the banks had to desperately look for deposits to adjust down their ADR. Such desperation led to sudden surge in demand for deposit and It put a leash on lending growth. Surge in NPL (non-performing loan) also pushed the banks to take cautious stance.

Meanwhile, NSC (National Savings Certificate) sale was at peak. This is another option for savers to put their money in and Government's another source of borrowing. NSC sale offered higher return than any other fixed income security available for savers. And there was less restriction and supervision as it is now regarding purchase of NSC. So, deposit mobilization to banks had another roadblock in place.

As you can expect, deposit rate started climbing up. Eventually lending rate also went up but at a lag. There were few stimulus in between like CRR (Cash Reserve Ratio) cut in April 2018. But interest rate kept rising and private sector credit growth kept falling.

Government also shifted towards bank borrowing from high cost NSC. As a result, treasury bill and bond rate also increased significantly.

Finally Pandemic happened. It left the Government and Central Bank no choice but to inject liquidity for avoiding any economic debacle.

Series of monetary stimulus came in:
  • CRR cut by 150 basis points
  • Repo Rate cut 75 basis points
  • Large devolvement of Bangladesh Bank meaning central bank's injection of liquidity in the financial system

Some surprising element:

  • Remittance posted record growth
  • Significant BoP surplus
  • Bangladesh Bank purchasing USD from banks to keep the exchange rate stable as supply of USD is higher than the local currency
  • It poured more liquidity in the financial system
  • But credit growth is yet to pick up

Consequences:

  • Significant liquidity in the financial system
  • Interest rate experiencing sharp fall

Caveat:

  • Currently there is a lending rate cap imposed by central bank at 9.0%
  • It may have major implication once interest rate starts rising up again

 

 

 

 Weighted Average Deposit Rate (%)

Source: Bangladesh Bank

 

 

 Weighted Average 91 Day Treasury Bill Rate (%)

 

  

Source: Bangladesh Bank

 Private Sector Credit Growth (%)


 Source: Bangladesh Bank


 

 

 

 

Popular posts from this blog

How Food Delivery Apps Make Money

By
Third party food delivery is proving to be a tough business space with minimum option to differentiate, tight profitability margin and intense competition that is putting the industry in the process of more and more consolidation.  When Uber started and turned into something that people would use everyday, it became obvious that the idea of moving people from Point A to Point B with the help of an app would branch into Uber for other services like food delivery, groceries or any other parcel. The world of convenience economy was only about to expand. Like Uber, an app would connect merchants to consumers via riders. The app is a platform that help connect these three parties that are required to make a transaction and shipment. The space that was ripe for disruption in this convenience economy was restaurants. Most restaurants didn't have their own delivery logistics. There were only few exception that you can think of that had their own delivery logistics. They had so because they
Read more

What to Look for in a Cash Flow Statement

By
Cash flow statement demonstrates the flow of cash coming into a business and going out from a business. It differs from income statement because cash flow statement is recorded on a purely cash basis. In income statement, if a business booked a sale of a product or a service and was yet to receive cash from the customer, the business would record it as sale in its income statement. On the other hand, if the business purchased raw materials for the products they sold or incurred cost for the service they provided, they would record this expense as cost of sales or cost of service regardless of whether the transaction was on a credit basis or cash basis. This method of accounting is called accrual accounting which is the most used method of accounting for income statement. So, cash flow statement gives you a different perspective. Since, it records how much cash is coming into a business and going out from the business through operating activities, investing activities and financing acti
Read more

Understanding Free Cash Flow

By
When I was first introduced to the concept of 'free cash flow' back in my BBA program, I didn't grasp it as clearly as I should or could have. I blame myself for not putting in enough effort to understand the concept back then.  Now that I have spent a considerable amount of time using ‘free cash flow’ as one of the major valuation methods, I can see how this concept can be learned in an effective way. In this article, I attempt to explain how businesses generate free cash flow, what it means to investors, and why and how free cash flow is used in company valuation. The Basic In a nutshell, free cash flows are the cash flows available for distribution to suppliers of capital . When we consider free cash flow to the firm (FCFF), it is the cash flow available to both debtholders (those who lend to the company) and stockholders or equity holders (those who buy the stock of the company or have equity ownership of the company). And when we consider free cash flow to equity
Read more

History of Money and Monetary Systems

By
From ancient Rome to modern world, money has gone through an evolutionary process. For the Roman empire, scarcity of silver and gold meant resorting to debasement to create new money. For the Inca empire, the same silver and gold was sacred precious metals coming from the hand of God. Spanish empire hunted for these precious metals to accumulate power but in truth abundance of silver lowered the value of the metals for which they had unquenchable lust. But over the course of time, the concept of money turned out to be a simple narrative installed in the minds of the people. The truth of the matter is, be it gold or silver or simply a piece of paper or the digits in your mobile wallet, the money has the value only if other people value it the same way. It's a machine driven by trust. The narrative of money has made a significant contribution to the progress of humankind. Although It was often flawed and we are yet to find a perfect system, the concept of money was one of the greates
Read more

How Pinduoduo Made it Big | History of Pinduoduo

By
Alibaba (Taobao and Tmall) and JD was dominating the China e-commerce space and no other company was able to match their scale until a new company emerged with an aim to serve the tier 3 and 4 cities that remained underserved. It focused on perishable products and daily necessities to make sure the users have high purchase frequency and it was also their category of choice because of low competition. It growthhacked its way by offering group buying feature at too good to believe discounts. It took it to the next level by focusing on interactivity by making the app browsable for fun and rewards. The company’s IPO prospectus referred to the platform as mix of Costco and Disneyland, the pricing is the Costco part and the fun browsing is the Disney part. Pinduoduo built a recipe for building a social commerce platform that mimicked the way people shop offline. It took cues from the gaming world to entice users to spend time on the app. All these viral elements made Pinduoduo the largest e
Read more