BB extends policy support to help banks cut losses in bonds
In an effort to help the banks cut down on their losses the central bank has enhanced the held-to-Maturity (HTM) limit
Due to the increased interest rate of government treasury bonds, both private and state-owned banks have been suffering losses. In an effort to help the banks cut down on their losses the central bank has enhanced the held-to-maturity (HTM) limit.
The decision was published in a circular by the Bangladesh Bank on Thursday.
According to the new directive all banks – both primary and non-primary dealers – are now permitted to exceed the maximum held-to-maturity limit by 10 percentage points for a limited period.
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The maximum limit is reset as 120% of the Statutory Liquidity Ratio (SLR) for all non-primary dealer banks and 135% for all primary dealer banks.
The central bank said the limit will be restored to its present state in a phased manner.
The market price of government treasury bonds are reevaluated every Thursday. Banks incur losses on the bonds when the rate goes up.
A Bangladesh Bank official told The Business Standard that bonds that are at HTM are required to be revised every week.
Further explaining the situation, he said, "For example, a bank bought bonds at a 2% coupon rate which has now gone up to 4% – this means losses to the bank's provident account."
"The central bank directive aims to cut down the losses to 60%," he added.
The central bank's move of lifting money from the money market has already been reflected in reduction of excess liquidity.
The total excess liquidity, which reached a historic high of Tk2.31 lakh crore in June this year, came down to around Tk8,000 crore in a month in July.
The squeezing of money supply and rising credit demand hit all kinds of interest rates, pulling out from the historic low level.
For instance, the yield rate, which was 0.54% on the first auction day of Bangladesh Bank bills on August 9, increased to 2.44% in September.
The rate of long term treasury bills and bonds also jumped to 6.5% in September from 6% in July.
The call money rate also saw a surge as banks came back to the formal market after the central bank strengthened monitoring on inter-bank borrowing at less than 1%, which mainly was flowing to the stock market.
