Starting May 3, banks dealing with liquidity issues will be limited to using the central bank’s seven-day repo facility. This decision is intended to decrease the overall liquidity in the market.
Bangladesh Bank has announced changes to its liquidity support for commercial banks effective from May. From that date, banks facing shortfalls will rely only on the seven-day repo option instead of the previously available 14-day or 28-day support systems. Interestingly, the latter two options, especially the 28-day facility, were dropped last April.
The repo system is how banks access funds from the central bank when they encounter short-term liquidity gaps. According to the bank’s recent report, future guidelines will restrict them to only the seven-day repo after May. There’s also mention of a 5% haircut on the market value of the securities involved in these transactions.
Experts seem to think that this move to limit repos to just one week could ultimately help banks manage their liquidity more independently. This might lead to more dynamic borrowing and lending activities within the interbank market. However, some are cautious, noting that too much liquidity support can spur inflation, which isn’t ideal for the economy.
“Shifting to a seven-day repo will positively impact the market,” remarked an expert from the banking sector, suggesting that excessive borrowing from central banks typically leads to more money in circulation, further fueling inflation.
He pointed out that banks previously had two instruments for borrowing, but this new restriction will likely push them to rely more on the call money market. A senior official from Bangladesh Bank mentioned that the institution had bought about $5.5 billion from commercial banks this fiscal year, providing ample liquidity. Consequently, it seems that eliminating the 14-day option won’t disrupt operations significantly.
A deputy managing director from a private bank expressed concern that the reduced access to central bank funds could limit interbank lending. With just a seven-day repo, banks may find it more challenging to meet not only their needs but also engage in lending to each other.
Another official noted that banks should ideally look to the call market first for their borrowing needs to support a healthier interbank market. Yet, this isn’t the common practice currently.
It appears that many banks have been leveraging low-interest borrowings through the longer repo facilities to invest in government bonds, which provides them with attractive returns. The central bank aims to shut down this opportunity entirely by phasing out those options, keeping only the seven-day repo for improved effectiveness in its open market operations.
