Cenbank to end 28-day, 14-day Repo to boost call money market

The Bangladesh Bank has decided to discontinue the 28-day and 14-day Repo – a platform for borrowing from the central bank – to make the inter-bank call money market more vibrant and reduce their dependence on the regulator, with only the 7-day Repo facility remaining operational. 

Additionally, the money market regulator will not apply extra charges for taking money through Repo. 

The Bangladesh Bank announced these decisions at a meeting with its policymakers and the heads of treasury departments from state-owned and private banks today. 

Senior bank officials present at the meeting told The Business Standard that the 28-day Repo is currently used more frequently. However, the central bank explained that the decision aims to revitalise the market by making open market operations for banks and financial institutions more effective under the interest rate corridor.

A repurchase agreement, also known as a repo, is a form of short-term borrowing, mainly in government securities. Banks sell underlying securities to the central bank and, by agreement between the two parties, buy them back shortly afterwards, usually the following day, at a slightly higher price.

A central bank policymaker said Repo auctions are currently held for 7, 14, and 28 days, but the 28-day facility will be discontinued in March or April and the 14-day facility from June or July, leaving only the 7-day Repo available in the coming months. 

Commercial banks previously borrowed through the Repo facility daily, but the Bangladesh Bank halted this as part of the IMF's $4.7 billion loan conditions. From 1 July, Repo facilities were limited to Mondays and Wednesdays, with auctions reduced to once a week from November. Now, that window is being narrowed further.

Another policymaker in the central bank said the IMF loan conditions require reducing Repo tools. "Many banks rely on the central bank instead of the call money market, hindering their capacity development," the official noted. 

To curb this dependence, the central bank plans to discontinue the 14- and 28-day Repo facilities, he said.

"Banks are borrowing at low-interest rates through these repo facilities and profiting by investing in higher-yielding government treasury bills and bonds – we aim to end this practice," he added.   

The official said the existing Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) will continue daily, allowing banks unlimited borrowing through the SLF. 

"Banks are receiving 100% of their repo demand, ensuring smooth liquidity management," he added. Previously, an extra charge of 10 to 30 basis points was applied based on the repo tenor, but this fee has been removed to reduce banks' costs.

A private bank's deputy managing director said, "We informed the central bank of our concerns. Reducing the available repo outstanding may create liquidity challenges, especially for weaker banks. Additionally, we won't lend to all banks, as many lack repayment capacity. We will therefore be selective when lending depositors' money."

The banker said commercial banks have proposed introducing an intra-day Repo, explaining, "Currently, Repo repayments are deducted in the morning of the maturity date, while new repo funds are credited in the afternoon, causing liquidity management issues. We've requested the central bank to introduce intra-day Repo facilities to improve liquidity management."

Commenting on the possibility of some relaxation in the obligation of banks to maintain the Cash Reserve Ratio (CRR), a policy-level officer at the central bank told TBS that currently, banks are required to maintain 4% of their overall deposits as CRR. However, even if it is allowed to be reduced to a minimum of 3.5% on some days, the 14-day average must remain 4%. 

In terms of liquidity management, banks may be given some relaxation in the obligation to maintain the minimum daily CRR, although no decision has been finalised yet, he added.