Dhaka, Bangladesh (BBN) – The central bank of Bangladesh has issued guidelines on commercial paper (CP) with imposing bar on banks from giving guarantee for the money market instruments to avert possible risks.
The banks should not issue the CP in any form or provide any guarantee for the short-term securities, according to the guidelines, issued by the Bangladesh Bank (BB), the country’s central bank, on Sunday.
As per the guidelines, the current ratio of the issuer must be at least 1:1 as per the latest audited balance sheet. The debt-equity ratio of the issuer must be maximum 70:30 while banks investment in a single issue of CP shall not exceed 20 per cent of the respective issue.
“The central bank has issued the guidelines on CP for the banks aiming to minimize possible risk,” a BB senior official told BBN in Dhaka.
However, the banks will be allowed to invest in the CPs for enhancing credits to CP-issuers by acting as an issuing and paying agent (IPA), he added.
IPA means a bank that delivers CPs to the investors against the proof of payment and at maturity repays the investors after receiving funds from the issuer.
But the banks will not be allowed to invest in any CP issued by ‘bank-related persons’ as defined in the existing Banking Companies Act 1991 (Amended up to 2013), the central banker noted.
Commercial paper is defined as a secured or unsecured promissory note which has an original maturity between minimum seven days and maximum one year.
The CP is a short-term money-market security issued or sold by usually large corporate entities for funding operating expenses as well as current assets such as account receivables and inventories.