Bangladesh Bank has announced a significant tightening of liquidity management measures within the banking sector, confirming that the fourteen-day repurchase agreement facility will be phased out from 3 May. Under the revised framework, commercial banks will have access only to the seven-day repo facility for short-term liquidity support. Overnight repo operations, however, will remain available during reserve maintenance periods to assist institutions in meeting regulatory reserve requirements.
The decision was communicated through a revised directive issued by the central bank’s Debt Management Department. It follows an earlier move in April last year, when the twenty-eight-day repo facility was withdrawn. With the discontinuation of the fourteen-day tenor, banks will now operate within a narrower time horizon for short-term funding, a development that officials say is intended to foster greater discipline in liquidity forecasting and reduce reliance on central bank financing.
Revised Repo Structure
| Feature | Previous Arrangement | Effective from 3 May |
|---|---|---|
| Available Tenors | Overnight, 7 days, 14 days | Overnight (reserve period only), 7 days |
| 28-Day Repo | Withdrawn in April last year | Not applicable |
| Collateral Valuation | Market value | Market value less 5 per cent haircut |
| Penalty on Default | Repo rate | Additional charge equal to repo rate |
Under the new directive, securities pledged against repo borrowing will be subject to a five per cent haircut on their market value. For example, securities valued at 100 currency units will entitle a bank to receive liquidity worth 95 units.
Banks encountering repayment difficulties at maturity may apply for a seven-day rollover. However, failure to repay within the stipulated period will trigger a penalty equal to the prevailing repo rate for the entire tenure of the borrowing. With the repo rate currently standing at 10 per cent, default would effectively raise the total cost to 20 per cent.
Recent data highlight the scale of dependence on the fourteen-day window. In January this year alone, banks borrowed a total of 828 billion currency units through repo operations of various maturities. Of this amount, 632 billion—more than three quarters—was obtained under the fourteen-day facility.
Analysts observe that extensive recourse to central bank funding can expand the money supply and, over time, intensify inflationary pressures. By curbing access to longer-tenor repo financing, the central bank aims to encourage market-based funding strategies and stimulate activity in the interbank call money and repo markets.
Financial experts contend that although the policy may initially tighten liquidity conditions, it is likely to enhance risk management practices and promote a more resilient and self-reliant money market over the longer term.