Dhaka, Bangladesh (BBN)– Bangladesh has taken a series of decision including reducing Cash Reserve Requirement (CRR) and repurchase agreement (REPO) rate to help mitigate the liquidity crunch in the banking system.

Under the decisions, the Bangladesh Bank (BB), the country’s central bank, will slash CRR of the banks by 1.0 percentage point to 5.50 per while the interest rate on repo auction will come down to 6.00 per cent from the existing level of 6.75 per cent.

The deadline for implementation on the revised limit of advance-deposit ratio (ADR) has been extended three more months.

These decisions were taken at a tripartite meeting of Ministry of Finance, BB and Bangladesh Association of Banks (BAB) in the capital on Sunday.

Meanwhile, the Ministry of Finance (MoF) has already issued a notification allowing the state entities to deposit 50 per cent of their funds with the private commercial banks (PCBs), up from the earlier ceiling of 25 per cent on the same ground.

“After a thorough discussion at the meeting, the decision has been taken to cut CRR by 1.0 per cent until December 31 of this calendar year, subject to reviewing in June,” Finance Minister A M A Muhith told reporters after the meeting.

The finance minister ruled out the possibility of any increase in inflationary pressure on the economy following the implementation of the revised CRR. “Inflation is now under control. It will not increase this year.”

The minister also expects that the move will help bring down the interest rate on lending to single-digit shortly from the existing level.

However, former BB governor Salehuddin Ahmed expressed the concern over slashing of the CRR, saying that it would push inflationary pressure further up.

“Aggressive lending will start again with additional funds and non-performing loans (NPLs) will increase further,” the former governor noted.

The meeting also decided to extend the deadline by three more months to meet the revised limit of advance-deposit ratio (ADR) by the banks.

Under the extended timeframe, the banks, having ADR above the re-fixed limit, are allowed to implement the revised limit of ADR by March 31, 2019, instead of December 31, 2018, the meeting sources said.

On January 30, the central bank slashed ADR limit to help check any possible liquidity pressure on the market due to the banks’ ‘aggressive’ lending.

ADR is re-fixed at 83.50 per cent for all the conventional banks and at 89 per cent for the Shariah-based Islami banks. The existing ratios are 85 per cent and 90 per cent respectively.

On February 20, the central bank extended the timeframe for the first time by six months to December next for the banks to meet their revised ADR.

The meeting also decided to cut interest rate on the REPO by 75 basis points on the same ground, the sources also said.
According to the decision, the interest rate on repo auction will come down to 6.00 per cent from the existing level of 6.75 per cent, they added.

At the meeting, senior members of BAB urged the regulators to bring down CRR to 3.50 per cent from the existing level of 6.50 per cent.

Currently, the banks must maintain 6.50 per cent CRR with the central bank from their total demand and time liabilities on a bi-weekly basis.

The banks are also allowed to maintain the reserve at 6.00 per cent on daily basis, but the bi-weekly average has to be 6.50 per cent in the end.

The latest moves indicate that the central bank is going back to its expansionary monetary policy measures, as these would help improve liquidity flow to the banking sector, the senior bankers explained.

Following the CRR reduction, the banks will get an additional liquidity of around Tk 100 billion without paying any interest, BAB Chairman Nazrul Islam Mazumder told reporters.

He also said: “A huge amount of fund is now stuck with the central bank in the form of CRR. The fund cannot be invested. It neither plays any role in containing inflation.”

Among others, BB Governor Fazle Kabir, Finance Secretary (in-charge) Mohammad Muslim Chowdhury, Senior Secretary of Bank and Financial Institutions Division Md. Eunusur Rahman, Banking Reforms Advisor of BB S K Sur Chowdhury, BB Deputy Governor SM Moniruzzaman, IFIC Bank Chairman Salman F Rahman, Islami Bank Bangladesh Chairman Arastoo Khan, Premier Bank Chairman H B M Iqbal, and managing directors and chief executive officers of different PCBs including Syed Mahbubur Rahman, chairman of Association of Bankers, Bangladesh (ABB), attended the meeting.

The government as well as the central bank’s latest decisions came against the backdrop of rising trend of the overall deposit rates since the beginning of this calendar year, primarily due to withdrawal of funds from the PCBs by a section of depositors, including public sector agencies.

The withdrawal, according to the sector insiders, has resulted in a notable shortage of liquidity in the sector recently.

The problems centering the Farmers Bank Ltd (FBL) and some other scams have created a sort of crisis of confidence in the banking industry.

Some SoEs particularly oil and gas distribution companies have already withdrawn a part of their special notice deposits from PCBs, according to banking sector insiders.

The PCBs are now forced to offer higher rates to comply with the funded commitments to their clients as per respective schedules, they explained.

The situation emerged after the Farmers Bank failed to pay a fixed deposit worth over Tk 5.08 billion due to liquidity shortage.

The money belongs to the Climate Change Trust Fund (CCTF).

After the incident, the government fund managers particularly of power, energy and gas sectors are exercising caution while depositing funds with different PCBs.

Earlier on February 17 last, BB Governor Fazle Kabir at a function sought the finance minister’s intervention to stave off withdrawal pressure coming from the state entities.