BB fund feeding to banks squeezes

Fund feeding to commercial banks squeezes as the central bank lowers REPO-auction frequency to twice a week from five working days in a tight-fisting action evidently meant for inflation and NPL control.
The Bangladesh Bank or BB has said this is done to strengthen the money market and improve currency management. But it may tighten the liquidity on the market and may temper the interest rates.
The latest contractionary monetary measure is effective from today (Monday), according to a circular issued Sunday.
Now REPO auctions will be held for two days - Monday and Wednesday - and banks will be allowed to take funds from the BB on the two days under REPO arrangement. "If there be a public holiday on the days, then the next day will be considered for the auction," says the notification.
It is believed that every working day, REPO facilitates the banks to meet their money demands and they often avoid collecting funds from the defaulters-resulting in buildups of non-performing loans or NPLs in the banking sector.
Central bankers say this is to bring vibrancy on the interbank market or call-money market.
They say banks who need urgently can borrow through LSF (liquidity support facility) which bears 150-percent-basis-point higher or 10-percent interest.
"Banks now will be more aware of their treasury management," one central banker says about the disciplining action.
The International Monetary Fund or IMF had recommended one-day REPO operations instead of five working days and there was a deadline to meet the condition within this June.
The banking industry has around 10-percent non-performing loans of around Tk 17- trillion deposits.
Such huge bad loans impact the daily operations of the banks and they borrow from the central bank through the REPO mechanism at the rate of 8.5-percent interest.
Banks usually take on average Tk 50 billion through REPO form the central bank.
However, the other funding facilities from the central bank to the scheduled banks, including the ALS (assured liquidity supports), will remain as usual.
In the meantime, bakers say the banks usually get easy funds from the central bank and the latest decision of the BB will tighten the market. And this will ultimately lead to rise in interest rates.
Syed Mahbubur Rahman, Managing Director and CEO of Mutual Trust Bank or MTB, takes this as good in a sense that it may contain the inflationary pressure on the economy as the inflation is around 10 per cent on a point-to-point basis.
But he notes that this will tighten the market more and banks, especially those who have liquidity stress, may suffer. "We actually mainly take funds from the central bank as the inter-bank depth is poor," says the banker about implications of the monetary measure.
He says they cannot raise the lending rate overnight but deposit rates may spike after the BB decision.
But another senior banker, Emranul Huq, managing director and CEO of Dhaka Bank, told the FE that this would create pressure for those who have liquidity stress but may help bring discipline in the financial market.
Md Shahen Iqbal, a deputy managing director of BRAC Bank, feels that the banks may face trouble for the time being as they usually are not aware of the weekly fund requirements.
He suggests introduction of another facility for the banks which need fund urgently.
"When a client withdraws a large amount from a bank, then its outflow increases compared to inflows. And banks under such situation borrow from the central bank," he says about the bail-in measure.
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