Record liquidity support: Banks borrow Tk30.29 trillion from BB in FY24
In FY2022-23, banks borrowed Tk13.08 trillion in liquidity support from the central bank, which was already 7.5 times higher than the preceding fiscal year
Highlights
- In FY 2022-23, banks borrowed Tk13.08 trillion in liquidity support.
- Banks increased repo borrowing due to higher government borrowing.
- banks borrowed from the central bank at 8-9% repo rates
To maintain stability in the financial market, the Bangladesh Bank provided a record Tk30.29 trillion in liquidity support to banks through during the 2023-24 fiscal year, marking a 131% increase from the previous year.
In FY 2022-23, banks borrowed Tk13.08 trillion in liquidity support from the central bank, which was already 7.5 times higher than the preceding fiscal year.
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Many commercial banks faced liquidity shortages due to obligations related to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), forcing them to borrow heavily from the central bank.
According to Bangladesh Bank data: Tk16.70 trillion was provided to banks through repo transactions and Tk13.58 trillion was given to primary dealer banks under the Assured Liquidity Support (ALS) programme.
The Bangladesh Bank report states, "In FY 2023-24, the amount of ALS and repo transactions with BB has significantly increased compared to the previous fiscal year. Both repo and ALS contributed to this increase. Due to a tightening situation in the foreign exchange market, BB supported commercial banks by selling dollars. This caused a liquidity contraction in local currency, leading to a sharp rise in repo transactions."
Repo (Repurchase Agreement) is a short-term borrowing mechanism where the central bank provides liquidity to commercial banks against treasury bills and bonds.
In Bangladesh, repo loans must be repaid within 7 to 28 days.
The central bank emphasised its monetary policy framework, stating that it takes systematic actions to regulate money supply, interest rates, and exchange rates to manage inflation. The ultimate goal is price stability, high economic growth, and low unemployment.
Why banks increased repo borrowing
According to Mutual Trust Bank's Managing Director Syed Mahbubur Rahman, banks increased repo borrowing due to higher government borrowing. He explained, banks borrowed from the central bank at 8-9% repo rates and reinvested in treasury bills and bonds at 11-12% interest rates, making repo loans highly attractive.
Due to interest rate caps, savings certificates did not see significant investment, leading banks to rely on repo support, he added.
Weaker banks required repo assistance to stabilise the market and ensure liquidity flow. Low private sector lending led banks to increase investments in government securities, as the yield gap between government securities and repo rates was significant.
Impact of foreign exchange crisis on repo borrowing
A senior Bangladesh Bank official stated that banks faced massive dollar shortages in FY2023-24, primarily to cover import liabilities.
Banks purchased nearly $13 billion from the central bank, creating a liquidity shortfall.
At an exchange rate of Tk120 per dollar, this resulted in Tk1.65 trillion flowing out from banks.
Over the past few years, the central bank has continuously sold dollars from reserves, totaling $7.62 billion in FY 2021-22 and $13.58 billion in FY 2022-23.
A managing director of an Islamic bank added that liquidity shortages and high government borrowing rates forced banks to rely on repo loans to invest in government securities.
