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The Bangladesh Bank has planned to provide banks and Non-Banking Financial Institutions (NBFIs) with repo facility once a week, as per the recommendation put forward by the International Monetary Fund (IMF) for strengthening their liquidity system.
On condition of anonymity, a senior central bank official confirmed the matter to The Business Post on Thursday.
Currently, banks and NBFIs can do repo with the Bangladesh Bank every working day.
The central bank may start implementing the decision from July 2024. However, assured liquidity support facility (ALSF) and standing lending facility (SLF) for banks and NBFIs will remain unchanged.
Last week, 61 banks and 35 NBFIs held a meeting with the Bangladesh Bank where this decision was taken. In the meeting, the Bangladesh Bank suggested them how to overcome their liquidity crisis, and reduce dependency on the central bank for liquidity support.
If these banks or NBFIs need liquidity support, they will go to the money market and the interbank system instead of the central bank’s repo facility.
On condition of anonymity, several senior central bank officials said that the regulator has been providing liquidity support to these banks facing liquidity crunch.
Every day these banks seek liquidity support from the regulator, which is tough for the central bank to manage, one of the officials said. “We encourage these banks to go to the call money market.”
They observed that several banks did not maintain their liquidity system. “So, every day these banks and NBFIs come to the central bank for repo, which is not a good practice in the banking sector,” he added.
These banks and NBFIs should have maintained their liquidity system sincerely, but they use their liquidity carelessly as well. Now it’s also difficult for the management of the Bangladesh Bank to ensure the repo facilities every day.
The official said that Bangladesh Bank will give liquidity support through repo once a week from July 2024. On the other hand, the system of ALSL and SLF will remain unchanged, he added.
A senior official of a private bank who was present at the meeting preferring anonymity said that banks and NBFIs can get liquidity support through three systems. These are repo, ALSF, and SLF. Banks are getting liquidity facilities through repo every day, but the central bank suggested that these banks should manage their liquidity from their own funds and the call money market.
Currently, the repo rate is 8 per cent, and the call money rate is 8.48 per cent. The average call money rate—the overnight interest at which a bank borrows from another—stood at 9.57 per cent in January this year, hitting the highest average rate after 12 years.
The rate of standing lending facility (SLF) is 9.50 per cent, but on the other hand, the call money rate reached 9.57 on January 22. This meant that some banks could not borrow money at a 9.50 per cent rate from the Bangladesh Bank.
Talking to The Business Post, Ahsan H Mansur, Executive Director of Policy Research Institute of Bangladesh (PRI) said, “These banks do repo with the Bangladesh Bank as it is cheaper than the rate in the call money market. If banks borrow from the call money market, it will raise the cost of funds of banks, which in turn will ultimately narrow their balance sheet.”
The policy rate should be raised. Then banks will try to manage their liquidity from their own funds or interbank transactions, he added.
Ahsan H Mansur also said that liquidity support from the central bank is not a healthy practice for the banking sector.
These banks are suffering due to an increase in non-performing loans (NPL). So, the financial conditions of these banks especially five Shariah-based Islami banks are not good right now.
As a result, he said, these banks are not maintaining the cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR). So, the regulator should put emphasis on how to recover NPLs from influential people. If they do it, then the liquidity system will work automatically, he added.
