BB steps in to shore up banks’ financial muscle
The central bank yesterday rolled out long-term special repo, following the lead of the Reserve Bank of India, to help banks, many of which are cash-strapped, prop up their liquidity base such that they can adequately prime the pump during these extraordinary times.
Under the special repurchase agreement (repo), banks will enjoy funds from the central bank for one year, up from 28 days at present, by keeping their Treasury bills and bonds as collateral, according to the Bangladesh Bank notice.
"Beyond any doubt, this is a great move," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
This will help banks improve their liquidity base and enable them to extend loans less conservatively, said Rahman, the immediate past chairman of the Association of Bankers, Bangladesh, a forum of private banks' managing directors.
MA Halim Chowdhury and Emranul Huq, managing directors of Pubali Bank and Dhaka Bank respectively, echoed the same.
Banks will have to place their T-bills and bonds after securing their statutory liquidity ratio (SLR) as collateral, an exercise that would give protection to depositors and the BB control over the money flow to the market as well.
Their SLR would be 13 per cent of their total time and demand deposit.
Excluding their SLR banks now hold T-bills and bonds worth about Tk 72,000 crore. And they can get up to 85 per cent of the face value of their T-bills and 95 per cent of their T-bonds.
The base interest rate on the special repo is 5.25 per cent or equivalent to the policy rate set by the central bank, said a BB official. But the actual rate will be fixed at the auction from where the lenders will get the fund.
This interest rate may be slightly higher than the policy rate, and the auction committee of the central bank will take the final decision to this end, he added.
Lenders will be permitted to take the financial support only for the implementation of the Tk 95,619 crore-strong stimulus packages, which are dedicated to reviving the economy after the coronavirus-induced recess.
The long-term repo will help banks avoid the liquidity mismatch as they will have to give out loans for at least one year in many cases to businesses.
Most of the banks are now unable to mobilise deposits from savers as people are less interested in parking funds in banks due to the ongoing rainy days.
This is a kind of quantitative easing, a handy tool for central banks in times of financial meltdown or recession.
The Federal Reserve, the Bank of England, the European Central Bank, the Reserve Bank of India are now conducting quantitative easing to inject liquidity into the market.
Under the process, they are directly purchasing T-bills and bonds from banks such that they can be able to finance their private sector.
But in Bangladesh quantitative easing is different as the majority of the lenders do not have enough excess T-bills and bonds after keeping their SLR.
So, this is a time-befitting and more effective policy measure given the financial strength of the country's financial sector, the BB official added.