BB to pull out excess liquidity

The Bangladesh Bank (BB) has decided to withdraw excess liquidity from the banking sector to ensure monetary stability in the currency market.

In a circular issued on Thursday, the central bank’s Debt Management Department said money will be withdrawn through auction of the Bangladesh Bank Bill from August 9.

The circular was sent to the chief executive officers of all scheduled banks and financial institutions in the country.

The notice said the BB will hold a 7-day, 14-day and 30-day auctions this month. The 7-day and 14-day auctions will be held on August 9, 16 and 25, while the 30-day auction will be held on August 11, 23 and 31.

According to Bangladesh Bank, there is a surplus liquidity of around Tk 2,31,000 crore in the banking sector till June. The sector’s liquidity started to accumulate as demands for loans remained low amid the Covid-19 pandemic.

Typically, the banking sector holds around Tk 10,000 crore to Tk 15,000 crore in excess liquidity.

Officials of the central bank said banks do not get interest from this huge amount of excess money as appetite for bank loans plummeted drastically. As a result, most of the banks do not want to take deposit from customers. The latest decision on auction is aimed at restricting any possible diversion of banks’ fund to unproductive sectors.

However, it is yet to know how much liquidity will be pumped out of the market through the Bangladesh Bank Bills.

Ali Reza Iftekhar, chairman of the Association of Bankers Bangladesh (ABB), also managing director of Eastern Bank Ltd said both excess liquidity and fund crisis in the banking sector are harmful to the industry.

“I believe the move from the BB is a time-befitting as the latest monetary mechanism would help the banking sector come out from the excess liquidity curse,” Iftekhar told The Business Post.

Talked, Salehuddin Ahmed, former BB Governor, said it is the sole responsibility of the BB to pump out the excess liquidity from the banking sector and inject money when they are in crisis.

“If any bank shows no interest for the BB auction, then conditions may be imposed on those unwilling banks so that they become liable to lend from their funds in excess,” Salehuddin said.