Cenbank stops daily repo lending to banks

Starting 1 July, the Bangladesh Bank ceased its daily repo lending to banks to strengthen the country's currency market and improve currency management.

"Banks will be able to borrow through repo lending from the central bank only on Monday and Wednesday of every week," the central bank said in a circular today (1 July). 

Banks use repurchase agreements (repo) for short-term borrowing from the central bank. The open-market operations involve the central bank buying and selling government securities to regulate money supply and credit conditions.

In cases where these days coincide with a holiday, repo lending will be conducted on the subsequent working day, it said.

However, the Standing Lending Facility and the Standing Deposit Facility will continue at prevailing rates on a daily basis, it added.

Md Mezbaul Haque, spokesperson for the central bank, told TBS that the reduction in repo lending days aims to enhance banks' treasury management. 

"This adjustment will require banks to manage their treasury operations more effectively by borrowing from the central bank at scheduled intervals. However, in case of emergencies, banks can still access funds through the Standing Lending Facility," he said.

The Standing Lending Facility (SLF), previously known as the Special Repo, is used by banks for contingency fund management. Currently, the interest rate for SLF is 10%, compared to 8.5% for repo.

The Standing Deposit Facility (SDF), formerly called Reverse Repo, has an interest rate of 7%. Banks can utilise the SDF to deposit their excess liquidity with the central bank.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said, "We have been hearing for several days that daily repo lending to banks will cease as part of a tighter monetary policy. Borrowing through SLF, in addition to the twice-weekly repo lending, should not pose a significant problem for banks."

However, he noted that the shift away from daily repo lending might put some pressure on the call money market. The overall impact will become clearer after a few weeks.

Analysing the central bank's data reveals that although the central bank lent an average of Tk20,000 crore to banks per day through repo a month ago, this amount has been gradually reduced.

On 30 June, the central bank lent Tk16,485 crore through various facilities, including repo, assured repo, Assured Liquidity Support Facility (ALSF), Standing Lending Facility (SLF) for commercial banks and financial institutions, and Islamic Banks Liquidity Facility (IBLF) and Special Liquidity Support (SLS) for shariah-based banks.

Shaheen Iqbal, deputy managing director of BRAC Bank, told TBS, "Liquidity management should not be an issue even if the cost of funding for banks increases due to the use of SLF."