The Bangladesh Bank (BB) is likely to introduce intra-day liquidity facility (ILF) in July, giving commercial banks a much-needed respite amid the gradual squeezing of the repo facility, officials said.
Commercial lenders have been demanding such a facility in recent times to avert fund settlement-related problems following the phase-out of the existing repo facility, according to them.
ILF is an instrument to provide funds for a bank by the central bank for the duration of a business day against securities provided as collateral by the bank.
As the Bangladesh Bank has decided to allow only the seven-day repo facility from July, it would create serious problems for banks in terms of fund settlements.
Under the facility, the regulator will provide the required credit to the banks having credit shortages in their accounts with the BB automatically soon after the deduction of the borrowed funds in the morning on the maturity date.
Once the banks' repo appeals are accepted in the evening, the ILF amount will automatically be deducted from their accounts.
Seeking anonymity, a BB official said the central bank high-ups have officially accepted the ILF-launching proposal and instructed the department concerned to take necessary action in this regard.
The official informed that the central bank's payment system department has been given the responsibility as the funding facility will be managed in the core banking system through the real time gross settlement (RTGS) system.
"Hopefully, we will be able to start ILF for banks from the start of the next fiscal year (FY26)," the central banker said.
To meet one of the International Monetary Fund's (IMF) conditions as part of its $4.70 billion lending package for stabilising the country's macroeconomic situation, the central bank cut the daily liquidity support against the repo facility to twice a week (Monday and Wednesday) in July last year.
Later, it was reduced to once a week with effect from November that year.
Following such clenched-fisted regulatory moves, commercial banks are now allowed to borrow funds from the central bank against repo window in three segments of seven-day, 14-day, and 28-day tenures.
But from this month, the regulator phased out the 28-day borrowing instrument for banks and the 14-day one will be discarded by June in accordance with the BB's decision under the modernisation of the monetary policy framework.
Deputy Managing Director and Head of Treasury and Financial Institutions at BRAC Bank Md Shaheen Iqbal told The Financial Express the Bangladesh Bank plans to phase out the 14-day and 28-day repo facilities by the end of FY25.
This means banks have to pay back the borrowed funds at maturity against the 14-day and 28-day repo, he said.
He noted that the central bank automatically deducts the borrowed repo amount in the morning on the maturity date from a bank's CRR account, but the latter gets repo funds again in the afternoon.
"Within this gap, banks would face fund settlement-related problems. If the central bank allows ILF, like in many other countries, that will help banks avoid such troubles and improve their liquidity management capacity. The regulator will deduct the ILF funds once fresh repo is accepted," Iqbal added.
The experienced banker also said the facility will not only give banks a breathing space but also help with government borrowing efficiently.
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