Dhaka, Bangladesh (BBN) - The central bank has allowed banks to offer loans to clients against Treasury Bonds (T-bonds) kept as collateral aiming to bring dynamism in the country’s bond market.
All scheduled banks are now allowed to extend overdraft or term loan facilities to customers by keeping Treasury Bonds as collateral, according to a notification, issued by the Bangladesh Bank (BB), on Wednesday.
However, the securities must first be marked as ‘lien’ in the Financial Market Infrastructure (FMI) system before providing any loan facilities to clients.
A lien is a legal right or claim that a lender has over an asset (the T-bonds) belonging to a borrower.
The BB latest moves came after the banks expressed interest in offering credit facilities backed by T-bonds, as bonds placed under lien have now been recognised as eligible collateral.
Earlier on November 27, 2024, the central bank asked scheduled banks to follow specific conditions when providing credit facilities against government securities.
“Banks have expressed their interest in extending credit facilities to clients against Treasury Bonds held under lien,” the central bank said in the notification.
The central bank has capped such lending at a maximum of 75 per cent of the face value of the T-bonds used as collateral.
The banks have also been instructed to ensure that the outstanding loan amount does not exceed the bond’s face value under any circumstances, including due to accrued interest, the notification added.
In addition, the maturity of the loan must not exceed the maturity period of the underlying bond, a measure designed to avoid potential asset-liability mismatches and repayment risks.
The notification also bars the banks from extending loans for the purpose of purchasing T-bonds, a step aimed at preventing leveraged investment in government securities.
The move will enable investors to unlock liquidity from their bond holdings without selling them in the market, according to bankers.
“This facility may help investors manage short-term liquidity needs while retaining their investments in government securities,” a senior treasury official at a leading private commercial bank said while replying to a query.
Market participants believe the decision could also strengthen activity in the government bond market by making T-bonds more versatile financial instruments.
Treasury officials noted that allowing loans against bonds could encourage institutional investors, corporates and high-net-worth individuals to hold government securities for longer periods, as they would have the option to access liquidity when needed.
Currently, five Bangladesh Government Treasury Bonds with maturities of two, five, 10, 15 and 20 years are traded in the market.
BBN/SSR/AD