The repo auction program to provide liquidity from Bangladesh Bank to commercial banks and finance companies has been reduced. However, to provide liquidity to banks and finance companies for urgent needs, the existing instant loan facility and instant deposit facility will continue as before. By using these instruments, the concerned institutions can take loan and deposit facilities from the central bank.
In this regard, a circular was issued by the central bank on Monday (July 1) and sent to the chief executives of commercial banks and finance companies. This directive will be effective immediately.
Earlier on Sunday, the central bank issued a circular and decided to hold repo facility twice a week instead of every working day to provide liquidity to banks. The auction will be held every Monday and Wednesday. If any of those two days is a public holiday, the auction will be held on the next working day.
After this decision, there was a mixed reaction among banks and finance companies. They worry about liquidity especially for emergencies because banks need money almost every day. If they spend two days there, they will be in trouble. When the matter was brought to the attention of the central bank, they issued fresh instructions at the end of the day.
According to the sources, two instruments are already in place - instant loan facility and instant deposit facility - to provide liquidity to banks and finance companies on an emergency basis. Its auctions are also available to be held daily. But its use was less.
The central bank also used these two instruments to provide less liquidity. Now due to IMF conditions the repo facility has to be reduced. Due to which both the Instant Loan Facility and Instant Deposit Facility facilities will now be reactivated.
Banks can use these instruments daily to take liquidity facilities from the central bank if they wish.
Banks and finance companies buy various government sector bills and bonds every week through auctions from the central bank. The proceeds from these are provided by the central bank as loans to the government.
If for any reason the bank finance company needs money on an urgent basis, it can re-sell or mortgage those treasury bills or bonds to the central bank. This is called a repo. Earlier, banks and finance companies could lend on every working day of the week through repo.
From now on, the central bank will provide repo facilities on two days a week, i.e. Monday and Wednesday, instead of every day. As a result, the banks have to take liquidity support from the central bank on those two days.
Apart from this, if you need emergency money at other times, you have to borrow from Call Money Market or other banks. Besides, you can also borrow from the secondary bond market.
But the secondary bond market is not active. Due to liquidity crunch in other banks, transactions in Call Money have decreased. Short and term borrowings have also come down. Taking these issues into consideration, the central bank has decided to make the previous two instruments more active in fund management.