Banks turn to BB amid sudden demand for cash

Commercial banks have suddenly started borrowing from the central bank to manage the growing cash withdrawal pressure ahead of the national election scheduled for December 30.

Ten banks borrowed Tk 3,687 crore from Monday to Wednesday last week by way of repurchase agreement (repo) and the assured liquidity support facility (ALSF) to meet their instant liquidity demands.

On December 18, AB Bank borrowed Tk 400 crore, Trust Tk 350 crore, One Tk 200 crore, EBL Tk 183 crore, Dhaka Tk 120 crore, National Tk 97.50 crore, NRB Tk 41.50 crore, Uttara Tk 27.02 crore and Standard Bank Tk 25 crore.

The repo and the ALSF are short-term loans disbursed by the banking regulator to commercial banks in case of any shortfall of fund.  A bank has to count 6 percent interest if it takes loans through the repo and the ALSF from the Bangladesh Bank.

Primary dealer banks, which are dedicated to providing funds to the government by purchasing treasury bills and bonds, are only allowed to borrow from the central bank using the ALSF.

The banking sector has been facing liquidity crisis in recent months, but banks hardly went to the central bank to manage their required cash, a managing director of a commercial bank said yesterday, requesting anonymity.

“But we have been forced to take liquidity support from the central bank this time because of huge cash withdrawal ahead of the parliamentary polls,” he said.

The candidates contesting in the election and the political activists are now on a spending spree to conduct electioneering, adding more pressure on the banks' liquidity base, he said.

The trend of the cash withdrawal will continue into next week considering the peak time of the election campaign, the CEO said. 

The central bank injected funds amounting to Tk 8,000 crore into some banks in August to help minimise cash withdrawal pressure during the Eid-ul-Azha, the second largest religious festival for Muslims, according to BB data.

The BB pumped Tk 74.80 crore into a bank on April 12 for the first time this year.

It is a natural phenomenon that lenders take liquidity support from the central bank almost every year ahead of Eid, the CEO said.

“Banks have not taken adequate preparation for the cash requirement during the polls as majority of them failed to foresee the crisis.”

The cash-strapped banks mobilised funds through the call money market throughout the year. But the banks, which are the major players in the call money market, are also now under pressure because of the election-related fund requirement, said the treasury head of a private bank said.

The upward trend of interest rate on deposits has compelled the banks to borrow money from the central bank, Syed Mahbubur Rahman, chairman of the Association of Bankers Bangladesh, a forum of the managing directors of all commercial banks.

“Growing spending centering the upcoming election has also played a role in forcing the lenders to move to the central bank.”