Online Desk: Cash feeding to banks begins over again in a policy shift by the central bank perforce following liquidity crunch, bankers say about the abrupt bailout action.

Economists say the Bangladesh Bank’s latest retreat from the contractionary monetary-policy stance for inflation combat comes as costly dollar, loan default and rate raise sap banks’ cash stock.

In less than two months, the regulator backtracked on its policy of curtailing money support to the commercial banks, said officials and bankers.

Now, the Bangladesh Bank is allowing all bids for cash supports placed by the liquidity-starved scheduled banks against government securities to ease looming cash crunch in the banking industry.

Sources at the BB said the banking regulator began late September 2023 squeezing liquidity splurge on the money market to contain nagging inflation and started allowing 80-percent liquidity requirements for the banks.

As the commercial lenders’ stock of formal credits is getting emaciated fast because of the BB’s recent money-supply contraction to contain inflation, the borrowing trend through interbank mechanism increased significantly that pushed up the call-money rate to over 8.0 per cent, the sources said.

As part of the latest move, the government auction committee on risk-free investment instruments keeps accepting all the bids placed by the commercial banks. The commercial banks can get financial feedback mainly to meet their SLR and CRR requirements from the central bank through using short-term windows like REPO, liquidity supports, standing lending facility and Islami Bank Liquidity Facility (IBLF).

The banks’ bidding was especially for maintaining SLR and CRR with the regulator against their banking operations.

Seeking anonymity, a BB official said the central bank had started allowing full-scale liquidity support as demanded by the banks again from November 9, 2023 in view of the current state of liquidity tightness in banks.

“The BB took the decision only to cool down the persisting liquidity stress on the money market,” the official said.

Another BB official, preferring to be anonymous, said the banks, including the primary dealers, placed a liquidity demand amounting to Tk 177.74 billion under repo, standing lending facility, liquidity-support facility and IBLF at the auction held Sunday. “And the auction committee accepted all of their bids,” the official said.

The central banker mentions that commercial banks are facing difficulties in managing funds as the call-money rate keeps mounting because of the higher demand for credits in the interbank-lending dealings.

According to the call-money BB data, a total of 76 interbank dealings amounting to Tk 44.17 billion took place Monday (November 13, 2023). The highest call- money rate hit 8.50 per cent while the lowest recorded 7.25 per cent.

Seeking anonymity, the treasury head of a primary-dealer bank said the central bank backtracked on its earlier stance of curtailing liquidity support to banks so that the government can get funds from the banks as part of its domestic bank- borrowing requirements.

If the banks do not get required liquidity supports from the BB, the banks will go for placing much higher yield in the upcoming auctions of the government securities through which the government borrows funds to meet its budget deficit, he said.

“If it happens, it will certainly mount public liabilities manifold. That’s why the BB is now allowing 100-percent liquidity requirements placed by the banks to avoid the rate jump,” the senior banker added.

According to the BB statistics, the central bank provided liquidity support amounting to Tk 633.47 billion to the banks in June. The figure more than doubled to Tk 1.28 trillion the following month.

The uptrend in handout to the banks continues as the entire monthly volume of the liquidity supports ballooned to Tk 1.33 trillion in August 2023.

Contacted, Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz said giving support to the banks facing difficulties to maintain regular banking operations amid liquidity dearth is understandable and logical in the current context.

“If the facility is indiscriminately given to all the banks, it is not desirable and may have contributed further to inflation that has already hit the common people badly,” he said about the flipside.

“It should be targeted, providing credit supports to the banks which badly need the assistance for stabilising their financial health,” Mr Masrur suggests.