BB to launch new system to fix fund shortage for banks

Bangladesh Bank has moved to introduce a new system to help commercial banks that face a liquidity crisis by adjusting the shortfall with another bank having surplus funds with the central bank.
Under the system, BB will be allowed to adjust a bank's shortage in the cash reserve requirement (CRR) and statutory liquidity ratio (SLR) with another bank with surplus funds with BB.
The borrower bank, in this case, will have to pay an interest rate equivalent to the average call money rate or any other rate fixed by the central bank and agreed by the other banks.
The central bank convened a meeting in this regard on Thursday, chaired by Governor Atiur Rahman. Managing directors of different banks attended the meeting.
“This will be a win-win move for all banks,” the managing director of a private commercial bank told The Daily Star.
“The central bank and the banks have conceptually agreed on the issue. Now works are on to devise the mode of operations of the system,” he said.
Banks in Bangladesh are required to hold 6 percent of their deposits in the form of cash with BB. When a bank's deposits increase by Tk 100, and if the CRR is 6 percent, the bank will have to hold an additional Tk 6 with BB and the bank will be able to use only Tk 94 for investments and lending. Therefore, the higher the ratio (CRR), the lower the amount that banks will be able to use for lending and investment.
Every bank is required to maintain a minimum 19 percent of their net demand and time liabilities (deposits) as liquid assets in the form of cash, gold and un-encumbered approved securities at the end of business every day. The ratio of liquid assets to demand and time liabilities is known as SLR. An increase in SLR also restricts a bank's leverage position to pump more money into the economy.
BB officials said some banks out of the 47 scheduled banks operating in the country have been facing a shortage in liquidity regularly. They said these banks often cannot maintain the required CRR and SLR with BB.
BB officials said 12 primary dealer banks that have an obligation to invest in government securities and bonds face the liquidity shortfall the most. They said some primary dealer banks could not comply with the CRR on Thursday because of their liquidity crisis.
Abu Hena Mohd. Razee Hassan, deputy governor of central bank, said they held a meeting on the issue last week. “We've discussed the issue, but it is yet to be finalised,” Hassan told The Daily Star.
“We have to work more before we can launch the system experimentally.”