Banks seek intraday liquidity facility as quick-fix substitute

Commercial banks of Bangladesh demand introduction of intraday liquidity facility (ILF) as a quick-fix substitute for them to avoid likely payment gridlock following the phasing out of existing repo facility.

Treasury heads of the commercial placed the demand Monday at a meeting with the monetary policy unit of Bangladesh Bank (BB), the country's central bank, which plans to discard 28-day-tenure liquidity support against repo facility, meeting-insiders said 

Intraday Liquidity Facility or ILF is an instrument of providing funds to a bank by the central bank for the duration of a business day against securities provided as collateral by

the bank.

To meet one of IMF conditions binding its $4.70-billion lending package for stabilising the country's macroeconomic situation, the Bangladesh Bank has cut down the daily liquidity support against the repo facility to twice a week (Monday and Wednesday) since last July. Later, it was reduced to once a week with effect since November last.

Following such clenched-fisted regulatory doles, the commercial banks are now allowed to borrow funds from the central bank against repo window in three segments of 7-day, 14-day and 28-day tenures.

Seeking anonymity, the treasury boss of a leading private commercial bank said the BB plans to phase out 14-day and 28-day repos by the end of this financial year (FY'25). It means the maturity of the funds borrowed by banks will be same day.

He notes that the central bank automatically deducts borrowed repo credits in the morning on the maturity date from a bank's CRR account but the bank gets repo funds again in the evening.

"Within this gap period, the banks would face fund settlement-related problems. If the BB allows ILF, like in many other countries, that will help banks to avoid such trouble and the regulator will deduct the ILF funds once fresh repo is accepted," he told The Financial Express.

Another treasury head of a private bank hails the BB move, saying that majority of the banks borrow funds against repo, specially using 28-day-tenure ones, and invest in short-term treasury bills to make good profit in recent months.

"I do personally feel that the banks should pay more attention to efficient fund management through bolstering their deposit base," he says.

Speaking on condition of anonymity, a BB official concerned said they would recommend scrutinising technical aspects of the ILF. If viable, the regulator will go for it.

Apart from efficient fund management, the central banker says, the facility-curtailing move will force the banks to meet their fund requirements from the interbank spot market. "By doing so, we want to make the call-money market vibrate."

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