BB plans dollar swap with banks to boost reserves

The Bangladesh Bank will employ a swap mechanism to acquire US dollars from commercial banks to bolster the nation's foreign exchange reserves.

Although this marks a new approach for the Bangladesh Bank, the use of swap arrangements is a common practice worldwide for managing reserves.

"Banks can maintain their foreign currency holdings with the central bank. However, they have the option to receive an equivalent amount in taka, and in this case, the central bank will provide interest at a fixed rate," explained Mezbaul Haque, spokesperson for the Bangladesh Bank.

"Banks can acquire the necessary amount of dollars by depositing an equivalent amount in taka with the central bank whenever the need arises."

The spokesperson noted that the Bangladesh Bank has traditionally sold dollars to banks for an extended period. Simultaneously, when banks have excess dollars, the central bank has been purchasing them.

During a meeting with the MDs of the country's banks yesterday, Bangladesh Bank Governor Abdur Rouf Talukder told them about the dollar swap, spokesperson Mezbaul said.

According to a central bank report, the country's reserves stood at $20 billion on 24 January.

A central bank official said although there is a shortage of dollars in the country, some banks have sufficient supplies of foreign exchange.

The dollar shortage in scheduled banks is evident in the net open position holdings of foreign currencies. Currently, around 40 banks have NOP-long positions.

A bank's foreign exchange net open position (NOP) is the difference between its foreign currency assets and liabilities at a specific point in time. A long NOP occurs when assets exceed liabilities, while a short NOP occurs when liabilities exceed assets.

During the bankers' meeting, the governor urged MDs to prioritise key issues. He announced that prompt corrective action (PCA) would be implemented next year to enhance governance in the banking sector, Mezbaul Haque said while briefing journalists.

Additionally, the governor discussed the introduction of a new Alternative Dispute Resolution (ADR) system for the recovery of defaulted loans. At the same time, banks were instructed to boost the inflow of dollars from foreigners through their offshore banking units, he added.

Mesbahul noted that, due to the rise in the policy rate, a tight situation is expected for the next few months, potentially leading to a further increase in the repo rate. Banks are advised to take appropriate measures in response.

Instructions to increase dollar flow through offshore banking

Mutual Trust Bank MD Syed Mahbubur Rahman said they were instructed to go for promotional activities to increase foreign currency accounts in their offshore banking units to increase dollar inflow.

In the meeting, bankers also proposed increasing the interest rate for borrowing through offshore units, he said.

The governor said he will not make any compromises to restore good governance in banks, regardless of the political situation. He told the MDs to look into which banks can be merged in what process, Mahbubur also said.

At present, banks can charge the Secured Overnight Financing Rate (SOFR) plus 3.5%, and bankers have proposed increasing it to 4%, he said, adding, "If the higher interest rate is offered, foreign depositors will be interested in investing."

He also said bankers were asked to be proactive about implementing the PCA to get results by next year.

PCA framework will be implemented in 2025

As part of efforts to promote financial stability and maintain public confidence in the banking system, the Bangladesh Bank has introduced the new mechanism of the PCA Framework, which classifies troubled banks into four categories.

Under the Prompt Corrective Action Framework, banks exceeding 14% NPLs and falling below a 5% CRAR for 24 consecutive months, placed in Category 4, will not be able to accept any new deposits or extend new loans without prior approval from the central bank.

Banks will be categorised based on their 2024 audited financial reports, and the framework will take effect in May 2025.

ADR method for default loan recovery  

The Bangladesh Bank brought a change to the ADR guidelines, allowing banks to go for arbitration before filing writ petitions against defaulters.

The ADR method is to go outside the court and collect the debt through mediation arbitration as a result of the central bank circular.

In this regard, an official of the central bank said the customer will be informed through a letter and the debt will be recovered from him without putting him in legal complications. Besides, some interest may be waived to the customer following the instructions of the central bank.

He said the scheduled banks have to collect the customer's debt through Bangladesh International Arbitration Center (BIAC) institutions, although such institutions are currently very negligible in Bangladesh.