Affluent Banks Favour Low-Yield State Instrument

Despite a substantial cut in the interest rate on the Standing Deposit Facility (SDF), major commercial banks in Bangladesh continue to channel their surplus liquidity into this state-guaranteed instrument, even though interbank lending offers comparatively higher returns.

Industry insiders attribute this preference to subdued demand in the call-money market. With banks able to meet their short-term liquidity requirements through alternative sources, including dollar sales, reliance on interbank borrowing has waned. Analysts note that as yields on government securities have gradually contracted, the arbitrary gains once associated with such investments have diminished, further discouraging active call-money trading.

Caution over long-term investments also plays a role. Banks are anticipating the implementation of the Primary Dealer (PD) guidelines from February, which will restrict treasury bill and bond auction participation to PD banks. Affluent commercial banks, particularly those with “counterparty limitations,” are therefore opting to maintain surplus funds in the low-yield SDF rather than committing to longer-term instruments.

Bangladesh Bank (BB) reduced the SDF rate by 50 basis points to 8.0 per cent on 15 July 2025, aiming to stimulate activity in the call-money market. Yet, regulatory efforts have had limited impact, as banks continue to view the SDF as a safe and convenient avenue amid an economic slowdown that has dampened industrial and business borrowing needs.

According to BB statistics, affluent banks’ SDF deposits have fluctuated as follows:

A central bank official, speaking on condition of anonymity, noted that recent weeks have seen declining demand for short-term credit on the call-money market, reflected in a fall in the weighted average interest rate (WAIR) from over 10 per cent to 9.77 per cent. He added that BB’s market interventions, including dollar purchases to stabilise the foreign-exchange market, have eased liquidity pressures and contributed to this decline.

Foreign banks dominate participation in the SDF, though some state-owned banks have also begun utilising the facility, also known as reverse REPO. Standard Chartered Bank, for example, deposits over Tk 10 billion daily in the SDF to manage surplus liquidity, given counterparty limits in the call-money market.

A senior official from a state-owned commercial bank explained that historically, banks invested in government securities during periods of high yield and actively engaged in call-money trading. As yields have softened, the relative advantages have eroded, prompting banks to prefer short-term instruments like the SDF. With the forthcoming PD guidelines, this cautious approach is expected to continue, as long-term engagement in government securities may become more restricted.