BB's support helping banks avert pre-Eid liquidity crunch

Although banks in the country normally face a liquidity shortage due to cash withdrawals ahead of Eid-ul-Fitr each year, a majority of them have sufficient funds on hand this time around thanks to continuous liquidity support from Bangladesh Bank.

Banks together have been borrowing more than Tk 20,000 crore from the central bank each working day for the past few months to address their cash crisis, according to industry insiders.

Last Monday 45 banks availed Tk 25,006 crore from the central bank under its repo facility, assured liquidity support facility and Islamic bank liquidity facility.

The facilities are essentially a form of short-term borrowing by banks through the depositing of government securities with Bangladesh Bank on condition to buy them back at a specific date, usually for a higher price.

Commercial banks hold around Tk 100,000 crore worth of government securities in the form of their cash reserve ratio (CRR) and statutory liquidity ratio (SLR) at the central bank.

The CRR is a specified minimum fraction of the total deposits of customers which commercial banks have to hold as reserves in cash with the central bank overnight. The SLR is the same, but in the form of cash, gold or other securities.

On the other hand, the liquidity support has helped keep the interest rate of the interbank call money market stable ahead of Eid.

The interbank call money is an overnight market that mainly assists commercial banks in meeting their immediate liquidity requirements by facilitating lending and borrowing among banks.

The overnight interbank call money interest rate stood at 8.67 percent last Thursday, down from 9.27 percent a month earlier, showed the central bank data.

Bangladesh Bank is injecting funds through liquidity support to banks to keep the interbank call money market stable, said a senior official of the central bank seeking anonymity.

He also said the central bank has adopted a monetary policy targeting interest rates instead of the money supply since July last year in order to tame ongoing inflation.

The central bank had fixed the interest rate of the interbank call money market at 9.30 percent as a part of that monetary policy.

The banking regulator continues to provide liquidity support so as to prevent banks from imposing interest rates higher than that fixed for the call money market, said the official.

Asim Kumar Saha, deputy managing director and head of treasury at Mercantile Bank, said as banks continue to avail liquidity support from the central bank, it has given a boost to their liquidity before Eid.

He also said people are now adopting plastic money, which was why the pressure for cash withdrawals was declining.

Industry people also say the currency swap initiatives of the central bank are helping improve the liquidity situation at banks.

Under the currency swap deal, commercial banks can take local currency from the central bank in exchange for US dollars for a tenure ranging from seven days to 90 days.

The banking regulator has taken $1.17 billion from mid-February till date from commercial banks, according to several central bank officials.

Emranul Huq, managing director of Dhaka Bank, said the currency swap is a win-win for both Bangladesh Bank and commercial banks.

"Some banks have idle US dollars and they can now keep them with the central bank," he said.

"The arrangement is also allowing banks confronting liquidity shortage to avail local currencies from the central bank in exchange for international currencies," Huq added.