From BB hand to invisible hand: IMF looks to streamline standing lending and deposit facilities

The International Monetary Fund (IMF) has set six new benchmark conditions for Bangladesh to restore money market discipline and increase revenue generation. They are in addition to the conditions imposed by the $4.7 billion loan programme's performance criteria and indicative targets.

All the directives set by the IMF seem to have one common goal: to free up the economy and let market forces determine how the economy will perform moving forward. 

On the banking front

As per the latest set of conditions, the Bangladesh Bank (BB) will have to allow automatic access to the standing lending and deposit facilities for all banks, subject to the availability of accepted collateral for the former.

This is a monetary policy instrument that is adopted all over the world as a means to stabilise liquidity.

"It is now being done in many countries. It helps stabilise liquidity in the market. It is implemented when there is a demand for liquidity in the market from banks. They can access it whenever they want. On the other hand, if they have excess liquidity, they can deposit easily," explained veteran banker Mohammad A (Rumee) Ali, former deputy governor of Bangladesh Bank and Chairman of the ICC Bangladesh Banking Commission.

According to him, this is done to better enforce the monetary policy. The authorities can control the monetary policy through the interest rates offered when withdrawing and depositing funds.

How will things work?

There is, however, a standing lending facility and a standing deposit facility being offered by Bangladesh Bank. What do the directives from the IMF hope to achieve?

Experts and industry insiders say that as these funds are standing, they should be automatically available to all banks, subject to the availability of accepted collateral for the former. But at the moment, Bangladesh Bank is using its discretion, which is not letting the funds reach their full potential. This is an issue the IMF is asking Bangladesh Bank to address.

At the moment, the highest ceiling of the policy rate corridor of the standing lending facility (SLF) rate is 9.75%. In comparison, the lowest limit of the standing deposit facility (SDF) rate is 5.75%. While the policy rate, also known as the repo rate, is currently set at 7.75%.

"In the call money market, one bank lends to another bank overnight. If one bank says to another bank that they are going to only lend at a rate of 9.8%, the bank that is looking to borrow can avoid that bank and go to Bangladesh Bank and borrow at 9.75%.

On the other hand, some banks have surplus liquidity, but they can't get a deposit rate better than 5%. They can deposit their surplus at Bangladesh Bank and avail a rate of 5.75%," said Dr Zahid Hussain, former lead economist at the World Bank, Dhaka Office.

When there is a shortage of liquidity in the market, the interest rate in the interbank market will go up. To contain this, an upper bound has been set. If there is a standing facility where Bangladesh Bank will give you a loan at the rate no one else is, there will be liquidity injected into the tight money market.

Similarly, when you have a surplus and no one is willing to take the money at the stipulated rate, you will go to Bangladesh Bank and deposit it at a rate of 5.75% so that liquidity will move to Bangladesh Bank from the market, mopping up the surplus. This is how the call money rate will move within the range of 9.75% to 5.75%.

"But if this is left up to the discretion of Bangladesh Bank [and] if one bank gets the liquidity but another bank doesn't, then the system won't be 100% functional, as the idea is when the money market is tight, injecting liquidity into it, and when there is surplus liquidity to mop it up. If it is not equally accessible to everyone, then it won't work," explained Dr Hussain.

The IMF has also added the condition of streamlining open market operations. Because, as experts say, these two are related. Bangladesh Bank has a range of funds to manage monetary policy. There is a liquidity support fund for primary dealers; there is an Islamic banking lending facility; and there is also a special liquidity adjustment facility. All with different interest rates.

Experts say that by streamlining the IMF, with the standing lending facility and standing deposit facility in place, the others are no longer needed. All primary dealers will get the same treatment from the regulator.

"The other facilities need to be phased out slowly. Otherwise, banks are incentivised to gamify the system," said Dr Hussain.

Implementing the changes

Implanting the necessary changes shouldn't be too difficult for Bangladesh Bank. According to Dr Hussain, "Even any circular won't be needed. Just like we buy over-the-counter medicine, banks will be able to go and get the funds easily. If there is too much demand for funds, that means the monetary policy is not tight enough, so the rate will have to be adjusted."

"Conversely, if there is too much demand for depositing excess liquidity at the stipulated rate, that will mean there is too much excess liquidity in the system and it needs to be reduced," he added.

But the country's banking watchdog also needs to be wary of how these changes might impact the money market and need to have a solid game plan on how to go about fulfilling the goals set by the IMF.

"Whenever you adopt something new, it has an impact on the market. Because things were running a certain way, and now there is a change. So, an impact analysis must be done to make sure if there are any risks of destabilising the market in some way by implementing the IMF recommendations," said Mohammad A (Rumee) Ali.

"And based on that impact analysis, they can frame an action plan to gradually implement it over time, so there are no issues," the former BB deputy governor added.