When the financial sector is running with a severe liquidity crisis, the Bangladesh Bank has instructed non-bank financial institutions not to borrow from the interbank call money market, limiting their options to hunt liquidity.
Instead, the NFBIs have been asked to raise long-term funds by issuing bonds.
A circular issued by the central bank to this effect on Wednesday says some NBFIs are making long-term investments such as lease financing after taking short-term funds from the call money market. As a result, a maturity mismatch of funds is being created, making the institutions unable to pay off the short-term loans on time, says the circular, adding that the NBFIs are also failing to repay the depositors' money on time.
In view of these incidents, the central bank has imposed restrictions on NBFIs' short-term borrowing from the money market.
Several senior officials of the central bank said that the new directive was given based on the recommendations of the fact-finding committee of the central bank formed to monitor the performance of poor-performing NBFIs.
The central bank has taken this step to increase the money supply and prevent the ill-health NBFIs from borrowing money through overnight, short notice, and term loans from the banking sector.
A senior central bank official told TBS that the central bank does not lend money to NBFIs, so these institutions now have to raise money by issuing long-term bonds.
Bangladesh Bank Spokesperson and Executive Director Mejbaul Haque told TBS that he believes the latest move by the central bank will help reduce the maturity mismatch of funds in NBFIs.
Md Kyser Hamid, managing director and chief executive officer of Bangladesh Finance and Investment Company Limited (BD Finance), however, said, "From the instructions given by the central bank, we did not get any impression that money cannot be borrowed from the money market. The central bank has asked for raising long-term funds by issuing bonds. But, we need at least 4-6 months to raise funds in this way."
Many NBFIs will be in trouble if they cannot borrow money from the money market in these times of liquidity stress, he said, adding, "Some NBFIs are in a good position and they do not borrow money from the money market. Again there are many NBFIs who want to borrow money from banks but banks do not lend them money. But some NBFIs that are borrowing from the money market will now face some liquidity problems."
Mentioning that the interest rate on borrowing funds from the money market for more than one day is around 9%, he, however, suggested NBFIs take this high interest into account while borrowing.
Kyser Hamid also said some NBFIs can borrow from the central bank through repurchase agreements (repo), adding that many NBFIs had bought bills and bonds from the central bank against which they can borrow money.
According to a central bank report on NBFIs, aggregate classified loans and leases of NBFIs climbed to Tk17,327 crore at the end of September 2022 from Tk15,936 crore three months ago. The ratio of classified loans and leases against total outstanding loans increased to 24.61% in end-September 2022 which was 1.62 percentage points higher than that of the previous quarter and 6.99 percentage points higher than that of end-September 2021.