The central bank is set to bar banks from giving guarantee for commercial papers (CPs) to avert possible risks involving such money-market hotcakes.
Officials said the Bangladesh Bank (BB) is preparing to put such restrictions by issuing guidelines on the CP shortly as a safeguard against risks the banks may get in.
However, the commercial banks may be allowed to invest in the CPs for enhancing credits to CP-issuers by acting as an issuing and paying agent (IPA).
IPA means a bank that delivers CPs to the investors against the proof of payment and at maturity repays the investors after receiving funds from the issuer.
"We're still working on the issue," a BB senior official told the FE Thursday, in the wake of CP drawing much attention on the money market.
The central bank has decided that the banks should not issue the CP in any form or provide any guarantee for the short-term securities, according to the BB official.
Non-banking financial institutions (NBFIs) are now allowed to issue CP for meeting their liquidity requirements, he explained.
The NBFIs are not currently allowed to receive demand deposit like the banks and are not permitted to receive term deposits of less than three months.
"For this, they (NBFIs) face difficulties in meeting short-term demand for fund frequently," the central banker noted.
Earlier on May 29 last, the BB issued guidelines allowing the NBFIs to collect funds from banks, corporate entities and other NBFIs through issuing commercial paper as an instrument.
The central bank earlier had formed a committee, headed by a deputy general manager of the BRPD (Banking Regulation and Policy Department), for preparing draft guidelines on the CP for the banks.
"We've already submitted our draft guidelines on the CP to the authorities concerned for consideration," a committee member told the FE.
He also expressed the hope that the guidelines on the CP for the banks would be issued by the end of this month.
The banks will have to assess the issuer's overall debt- repayment capacity by taking into consideration the issuer's liabilities with other banks and NBFIs to make sure that the issuer has the ability to repay before investment in any CP.
The banks may not be allowed to invest in any CP issued by 'bank-related persons' as defined in the existing Banking Companies Act 1991 (Amended up to 2013). Currently, there is no policy on the CP, particularly for the banks.
Commercial paper is defined as a secured or unsecured promissory note which has an original maturity between minimum seven days and a maximum of one year.
The CP is a short-term money-market security issued or sold by usually large corporate entities for funding operating expenses as well as current assets such as account receivables and inventories.
It's emerging as a new money-market instrument to corporate houses in Bangladesh and subsequently the NBFIs along with the banks are getting involved with such security in different ways.
As an alternative to bank financing, the CP market has witnessed a rapid growth in Bangladesh for the last couple of years, according to the BB officials.
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