ALS becomes key tool for banks amid liquidity crunch

A liquidity-feeding derivative called Assured Liquidity Support (ALS) has become highly popular among commercial banks as the instrument holds mammoth share of the central bank's special liquidity facilities, officials and bankers said.

ALS is a kind of overnight borrowing facility provided by the Bangladesh Bank (BB) for the primary dealer (PD) banks, helping them meet their cash reserve ratio (CRR) requirement with the central bank.

There are a total of seven instruments through which the commercial banks can access special liquidity support from the BB. Using the instruments, the banks altogether borrowed over Tk 926 billion in March. Of the amount, the 24 PD banks received Tk 784 billion, which was more than 83 per cent of the entire special liquidity facility.

The second most-used instrument was Islami Bank Liquidity Facility (IBLF), with banks borrowing Tk 125 billion while Assured Repo (AR) facility against special bond-holding meant for settling accumulated arrears to independent power producers and fertiliser suppliers became third, with Tk 30.04 billion disbursed, according to the BB data.

Mudaraba Liquidity Support (MLS) is another instrument through which the Shariah-based lenders borrowed Tk 3.25 billion in March. Three other instruments - Capital Market Repo (CMR), Liquidity Support against Claims of Remittance for Conventional Banks (LSR) and Special Liquidity Support (SLS), however, remained unused.

BB officials said the central bank introduced this liquidity-feeding window only for the PD banks in 2008 as they have the underwriting obligation to devolve any undersubscribed bidding in the auctions of government securities (G-Sec).

As the PD banks have not been going through any devolvement for more than three financial years (FYs), the continuation of ALS would be irrational and have a detrimental effect on ensuring a level playing field for all banks, they said.

Apart from that, the International Monetary Fund (IMF) was critical of the continuation of the facility for the 24 PD banks during this non-devolvement regime and suggested that the government abolish it as part of the $4.70 billion lending package to stabilise the country's macroeconomic situation.

Requesting anonymity, a BB official said the PD banks have been extensively using the ALS since March and the growing trend continues on receiving information that the central bank is going to discard the facility at the beginning of the upcoming fiscal year (FY'26).

The official said the PD banks have the underwriting obligation to devolve any undersubscribed bidding in G-Sec auctions by themselves and purchase the undersubscribed part of the auctions. Against such investment in the form of devolvement, the official said, the banking regulator has allowed the PD banks to avail liquidity support through the ALS window at the repo rate, which is 10 per cent now.

But for the last three FYs, the banker said, no devolvement by the PD banks took place. "That is why the BB has decided to discontinue such liquidity-feeding instrument for the PD banks."

Speaking on condition of anonymity, the treasury head at a PD bank said while some banks have enough liquidity, many others are under liquidity stress and heavily dependent on BB liquidity support. On the other hand, he said, the liquidity windows keep shrinking in recent times. So, banks are using the available facility as much as they can, the senior banker added.

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