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After eight months of the decision, Bangladesh Bank (BB) finally discarded a major regular liquidity-feeding instrument for primary dealer (PD) banks called Assured Liquidity Support (ALS).

As part of the central bank’s decision to bring vibrancy in the interbank spot market through lessening commercial banks’ dependency over BB’s borrowing windows, the banking regulator has discontinued the facility from this December.

Officials concerned at the BB said the central bank introduced this liquidity-feeding window only for the PD banks in 2008 as they have the underwriting obligation to devolve any unsubscribed bidding in the auctions of government securities (G-Sec).

As the PD banks have not been going through any devolvement over a period of more than three financial years (FYs), the continuation of ALS would be irrational and have a detrimental effect on ensuring a level playing field for all banks, they said.

Apart from that, the International Monetary Fund (IMF) was critical about the continuation of the facility for the 24 PD banks during this non-devolvement regime and suggested the government abolish it as part of the $5.50 billion lending package to stabilise the country’s macroeconomic situation.

Seeking anonymity, a BB official said PD banks have the underwriting obligation to devolve any unsubscribed bidding in G-sec auctions by themselves and purchase the unsubscribed part of the auctions.

Against such investment in the form of devolvement, the official said, the banking regulator has allowed the PD banks to avail liquidity support through the ALS window at the repo rate, which is 10 per cent now.

But for the last three FYs, the central banker said, no devolvement by the PD banks took place. “That is why the BB had decided to discontinue such liquidity-feeding instrument for the PD banks in March last. We implemented the decision from this month.”

ALS is a kind of overnight borrowing instrument of the central bank which the PD banks largely use primarily to maintain their cash reserve ratio (CRR) requirement with the BB.

There are a total of seven instruments through which the commercial banks can access special liquidity support from the BB and ALS is the most-used window by the banks.

According to BB statistics, commercial banks altogether borrowed Tk 396 billion using seven windows under the special liquidity facility from the banking regulator in October last. Of the amount, PD banks took Tk 182 billion alone using ALS.

Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB), a PD bank, Syed Mahbubur Rahman said the PD banks would not face liquidity-related problem if there is no change in the REPO-backed borrowing facility.

As the BB continuous to purchase American dollars from the banks as part of its forex (foreign exchnage) market intervention under the existing free-floating crawling peg regime, he said, banks can get the liquidity-managing opportunity through selling the greenback to the central bank.

“But PD banks need to be more careful in liquidity management now,” the seasoned banker said.