BB to phase out 14-day repo from May 3

The existing repo facilities are being squeezed further as the Bangladesh Bank (BB) is set to phase out its 14-day liquidity window in a move to make banks manage funds more efficiently.

The Debt Management Department of the central bank recently issued guidelines for open-market operation (OMO) by scrapping the 14-day repo facility, which will be effective from May 3.

With the squeeze, commercial banks can now borrow funds from the central bank using repo only for the seven-day- maturity instrument.

But there will be overnight repo-backed borrowing facility for reserve maintenance period (RMP).

The new guidelines also stipulate a 5 per cent haircut on the market value of securities.

Currently, banks can receive liquidity support from the central bank through both seven-day and 14-day repo facilities.

Earlier, 28-day repo support was also available, but that was discontinued in April last year.

According to officials concerned, the move is deemed not only to force commercial lenders to seriously focus on efficient fund management but also help make transactions on the call-money market vibrant.

Seeking anonymity, a Bangladesh Bank official involved in the process said the regulator axed the facility as part of its ongoing initiative to streamline the money market.

If any bank faces difficulties in paying back the borrowed fund under the repo facility on the date of maturity, the lender can appeal for rollover of another seven days, he said.

In the event of default, the central banker said, the institution shall pay an additional charge as a penalty for the entire repo period and the penalty shall be equivalent to the agreed repo rate.

"It means the participating institution will pay penalty of 20 per cent - 10 per cent regular repo and additional 10 per cent as a penalty," he said.

Regarding the higher penalty, the official said they want to discourage banks from staying in repo as it creates money circulation.

"The banks should go to call money and interbank repo windows to manage their liquidity obligation."

Commercial banks make a beeline for borrowing heavily from the central bank's short-term 14-day repo after the pullback of its 28-day liquidity instrument largely to invest in sovereign securities.

The commercial lenders needing short-term liquidity are largely bent on 14-day repurchase instrument of the central bank and keep banking on it as much as possible.

As a matter of fact, the volume of credits handed out through the liquidity-availing window continues surging.

According to the Bangladesh Bank data, commercial banks altogether borrowed Tk 828 billion in January last by using the central bank repo facility (overnight, seven-day and 14-day tenures).

Of the amount, Tk 632 billion was 14 days' maturity.

Director General of the Bangladesh Institute of Bank Management Dr Md Ezazul Islam said the latest decision to scrap 14-day repo facility comes as part of the central bank's move to modernise liquidity management, which is a good move.

He said borrowing funds from the central bank causes money creation, which leads to inflationary burden.

"So, it is something that will help make money market vibrant without money creation," the economist said.

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