BB allows loans against T-bond

The central bank has allowed banks to offer loans to clients against Treasury Bonds (T-bonds) kept as collateral, a move aimed at bringing greater dynamism in the country's bond market.
Bankers say the decision could help attract more investors to government securities by enabling them to access liquidity while continuing to hold the risk-free assets.
All scheduled banks are now permitted to extend overdraft or term loan facilities to customers by keeping T-bonds as collateral, according to a notification issued by the Bangladesh Bank (BB) on Wednesday.
However, the securities must first be marked as 'lien' in the Financial Market Infrastructure (FMI) system before any loan facilities can be provided to clients.
A lien is a legal claim that allows creditors to seize and sell a debtor's property if financial obligations are not met.
The BB's latest move came after banks expressed interest in offering loan facilities backed by T-bonds, as bonds placed under lien have now been recognised as eligible collateral.
Under the directive, banks may finance up to 75 per cent of the bond's face value.
Banks have also been instructed to ensure that the outstanding loan amount does not exceed the bond's face value under any circumstances, including due to accrued interest, the notification added.
In addition, the maturity of the loan must not exceed the maturity period of the underlying bond, a measure designed to avoid potential asset-liability mismatches and repayment risks.
The notification also bars banks from extending loans for the purpose of purchasing T-bonds, a step aimed at preventing leveraged investment in government securities.
"We've allowed banks to offer loans against T-bonds to boost demand for the government-approved securities," a senior BB official told The Financial Express (FE) while explaining the main objective of the notification.
Senior bankers, however, welcomed the BB's latest move, saying it would help bring dynamism to the country's bond market.
"It's a market-friendly decision that will help attract investors to put their funds into risk-free securities," a senior treasury official at a leading private commercial bank told the newspaper.
Allowing loans against T-bonds could encourage institutional investors, corporates and high-net-worth individuals to hold government securities for longer periods, as they would still have the option to access liquidity when needed, the treasury official explained.
Currently, five Bangladesh Government Treasury Bonds with maturities of two, five, 10, 15 and 20 years are traded in the market.

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