Cenbank to guarantee 5 banks for interbank liquidity support

The Bangladesh Bank has entered into agreements with five crisis-hit banks to provide them with guarantees for obtaining liquidity support from the interbank money market.

If a bank facing a liquidity crisis receives a facility from another bank, it will request a guarantee proposal from the central bank accordingly. The Bangladesh Bank will provide guarantee facilities after considering the overall situation.

So far, seven distressed banks have applied to the central bank for guarantees to access more than Tk25,000 crore in liquidity support from the interbank money market.

Initially, the central bank on Thursday and Sunday signed agreements with five banks – National Bank, Social Islami Bank, First Security Islami Bank, Union Bank, and Global Islami Bank.

A senior official of the central bank stated that the banks with which agreements have been signed will now collect funds from the interbank market and submit them to the Bangladesh Bank for guarantee, subject to board approval. After that, the central bank will assess how much money each bank can take under the guarantee and approve the amount.

Previously, seven banks applied to the central bank for special loans. First Security Islami Bank sought a guarantee for Tk7,900 crore, Islami Bank Bangladesh for Tk5,000 crore, National Bank for Tk5,000 crore, EXIM Bank for Tk4,000 crore, Global Islami Bank for Tk3,500 crore, Social Islami Bank for Tk2,000 crore, and Union Bank for Tk1,500 crore.

After the fall of Sheikh Hasina's government on 5 August, the boards of these banks were dissolved and reconstituted.

Since November 2022, investors have been withdrawing liquidity following loan fraud incidents involving several banks controlled by S Alam. As a result, these banks have faced a severe liquidity crisis for the past year and a half, with some struggling to maintain their cash reserve ratio and statutory liquidity ratio.

Additionally, some banks have experienced current account deficits with the central bank. Former central bank governor Abdur Rauf Talukdar allowed transactions to continue despite these negative balances. However, new Governor Ahsan H Mansur has halted the special facility by printing money.

In this context, to address the temporary crisis, an initiative to borrow against the central bank's guarantee has been implemented. The Bangladesh Bank will also retain Demand Promissory notes from the weaker banks.

A central bank executive director told TBS that when a bank is in crisis, special loans are usually provided by the central bank. However, if the central bank lends directly, the money supply will increase, putting additional pressure on inflation. Therefore, the central bank is arranging loans from other banks instead of providing money directly.

This way, funds will transfer from one bank to another, minimising any additional impact on inflation. The central bank's guarantee means that if these banks fail for any reason, the central bank will cover that money.

In a press conference earlier this month, the governor said, "The central bank will not provide liquidity assistance by printing money as it has in the past. However, banks can obtain this assistance through interbank currency supply."