Unethical practice to destabilise money market: BB reports
Some banks are investing in long-term government securities by receiving short-term loans from the call money and Repo markets in a bid to earn high profit, violating banking ethics, according to Bangladesh Bank inspection reports. BB officials said the banks received loans from the call money market with interest rate of 5.50 per cent to 7 per cent in recent months and they invested the fund in the long-term government securities with interest rate of 8.67 per cent to 12.14 per cent.
The inter-bank call money and Repo markets are the trading systems from where banks and non-bank financial institutions borrow or lend money on overnight basis.
The BB inspection reports said Southeast Bank and Mercantile Bank had already plunged into negative cash mismatch situation due to such unethical practice which ultimately created liquidity risk to them.
Besides, such practice in the banking system will destabilise the call money market and put adverse impact on the interest rate at the market, the BB reports said.
A BB official told New Age on Sunday that the central bank governor,
Atiur Rahman, had recently asked the department concerned to conduct inspections to Southeast Bank and Mercantile Bank to ascertain the causes of their high borrowing from the call money market.
BB inspection teams unearthed that the two banks had converted their short-term loans received from the call money market into long-term loans by making agreements with the lender banks.
The BB official said that the banks had not repaid the borrowed money to the lender banks on the basis of overnight due to an absence of a guideline for the call money market.
The BB report showed that Southeast Bank borrowed Tk 695 crore from the call money market on February 7 this year although its net investment on the government securities stood at Tk 5,153.12 crore on the day.
Besides, Southeast Bank borrowed large amount of money from the call money market in recent months although the bank increased its investment in long-term government securities, violating banking ethics, the BB report said.
Under the circumstances, the negative mismatch of Southeast Bank stood at Tk 4,471.68 crore, according to the bank statement on October 31, 2013.
The BB official said that the negative cash mismatch increased as the bank extended its long-term investment by receiving short-term loans from the call money market.
Against the backdrop, the bank will increase its dependency on the call money market to meet demand of the depositors in the months to come which may destabilise the money market.
The BB reports showed that Mercantile Bank borrowed Tk 822.21crore from the inter-bank Repo market and Tk 263.25 crore through the SWAP process for its foreign currency accounts.
The negative mismatch of Mercantile Bank stood at Tk 3,653.06 crore, according to the bank’s statement on October 31, 2013.
Md Jahanghir Kabir, head of treasury of Southeast Bank, told New Age on Sunday that his bank had to invest in the government securities as the bank is now playing as a primary dealer.
For this reason, Southeast Bank has to borrow from the call money market to meet its instant cash need, he said.
He said, ‘My bank did not invest in the long-term securities by borrowing from the call money market. The negative cash mismatch is a natural scenario for every scheduled banks and NBFI.’
Mercantile Bank additional managing director Monindra Kumar Nath told New Age that he had no information about his bank’s investment in the government securities by borrowing from the call money market.
BB spokesperson and executive director M Mahfuzur Rahman told New Age that it was not legal for banks to make investment in the government securities by receiving loans from the call money market.
The BB will take punitive measures against the banks if found guilty, he said.
-With New Age input
