Cenbank to stop daily money supply to banks from July

The Bangladesh Bank has decided to discontinue its daily repo lending starting next July. Instead, banks will have the option to borrow from the central bank on a weekly basis, a move that aims to compel banks to manage their liquidity more effectively.

The central bank communicated the decision to banks during meetings with treasury officials held on Monday and Tuesday. Bangladesh Bank Executive Director Ejazul Islam, who chaired the meeting, told reporters.

A number of treasury officials told The Business Standard that they have been asked to follow international standards, such as open market operations (OMOs), by which different central banks buy and sell government securities (treasury bills and bonds). IMF also wants Bangladesh to follow OMOs as per international standards. 

The head of treasury of a leading commercial bank stated, "Bangladesh Bank warned us to operate within the interest corridor, meaning that inter-bank interest rates must not exceed 9.5%." He added, "Now we have to manage our assets and liabilities accordingly. This will increase our costs, but we have to follow the regulator's decision."

Banks use repurchase agreements (repo) for short-term borrowing from the central bank. The open-market operations involve the central bank buying and selling government securities to regulate money supply and credit conditions.

A treasury head from a private bank told TBS that banks, previously able to obtain one-day repo loans from the central bank as required, will no longer have that option. Instead, the Bangladesh Bank will specify a date for repo lending, and all banks will be required to take a minimum seven-day term loan on that designated day. This change aims to alleviate the burden of managing regular account upkeep or repo renewals.

Taking out a larger sum of money at once will result in a higher interest amount, based on the repo rate of 8%. However, any bank has the option to repay the borrowed amount with an interest rate of 6.5% on any day of the week, he added.

The treasury head of another bank said, "Our cost of funds will now rise. This is because when borrowing collectively for seven days, we may not require the entire amount on a single day. Previously, we could access funds with interest for just one day, but now we are obligated to pay interest for seven days."

"In numerous countries worldwide, central banks offer weekly lending. Following the guidelines of the IMF, the Bangladesh Bank is now adopting this approach," he added.

Banks are now borrowing from the central daily to deal with the ongoing liquidity crisis. The Bangladesh Bank provided Tk5,789.53 crore to banks under repo, assured liquidity support facility (ALSF) and Islamic Banks Liquidity Facility (IBLF) yesterday. A record Tk24,926 crore was lent on 28 February.

A senior central bank official told TBS that the decision was taken to invigorate open market operations. This move aligns with IMF conditions and is expected to expand the size of the call money market, thereby helping to restrain inflation. Furthermore, banks were encouraged to anticipate their borrowing needs in advance.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, commented on the decision, stating that the central bank is now urging banks to manage their own liquidity instead of relying on the Bangladesh Bank. He added, "This approach will not assist in controlling inflation."

Zahid Hussain, the former lead economist at the World Bank's Dhaka office, told TBS that this initiative will not make a significant impact on the money market, aside from streamlining processes for the central bank.

He further noted the IMF's recommendation for the central bank to manage the Assured Liquidity Support Facility (ALSF) and Standing Deposit Facility (SDF), but uncertainty looms over the effectiveness of this measure in achieving that goal.

Which countries follow daily repo, which don't

Federal Reserve: The Federal Reserve conducts weekly open market operations, including overnight and repo and reverse repo, to manage the level of reserves in the banking system and influence short-term interest rates.

European Central Bank: The ECB conducts regular liquidity-providing operations to provide liquidity to Eurozone banks and steer short-term interest rates.

Bank of England: The Bank of England conducts weekly reverse auctions, known as the Sterling Monetary Framework (SMF) operations, to provide liquidity to UK banks and maintain monetary stability.

Bank of Japan: The Bank of Japan conducts regular operations, including outright purchases of Japanese government bonds (JGBs) and lending through the Bank's lending facilities, to ensure stability in the financial markets and achieve its monetary policy objectives.

The Reserve Bank of India (RBI) conducts lending operations with commercial banks every week as part of its liquidity management and monetary policy implementation.