Normal banking business of primary dealers (PDs) is being seriously hampered due mainly to immense underwriting obligation relating to the government securities.

"Our short-term and long-term business growth plans are being hampered seriously due to substantial growth of the government securities. This is also creating problems in our liquidity and cash flow forecast that, in turn, is also affecting our day-to-day operational and investment activities," a senior member of the Primary Dealers Bangladesh Limited (PDBL) told the FE Saturday.

He also said each of the PD banks has been suffering from liquidity shortfall, leading to their failure to maintain cash reserve requirement (CRR) with the Bangladesh Bank (BB).

"At least seven out of 12 PD banks could not comply with the CRR of the central bank Thursday last because of their liquidity shortfall," the PDBL member noted.

The central bank will sit with top leaders of the PDBL today (Sunday) to devise an effective mechanism to solve the existing problems, an executive director of the BB told the FE. 

"We've been informed about the latest situation of the PDs," the BB executive director said without elaborating.
Meanwhile, one more PD has already informed the central bank about their intention to surrender the primary dealership licence by discontinuing participation in auctions of both treasury bills and bonds. 

"The PD bank wants to continue its normal banking operations through surrendering the primary dealership licence," another PDBL member said while explaining their situation.

He also said the PD bank has not taken part in auctions of both treasury bills and bonds since November 24 last.
Two non-banking financial institutions (NBFIs) have also been refraining from participation in auctions of both treasury bills and bonds from April 2011 on the same ground. 

Excess holding of the government securities by 12 PD banks stood at Tk 188.33 billion after maintaining their statutory liquidity ratio (SLR) as on January 5 last which has created liquidity pressure on the commercial banks.
"We've been compelled to purchase low yielding government securities against our underwriting obligations in each primary auction with the fund collected from different sources including depositors at higher rate," the PDBL member said.

Under the existing provisions, only the PDs are allowed to submit the bid in the primary auction of government treasury bills and bonds.

The central bank introduced the system for the first time in Bangladesh for the April-June period of 2011 to boost the country's secondary securities market through strengthening the activities of the PDs.

Under the system, non-PD banks and financial institutions are allowed take part in the auction only through the PDs. 
The non-PD banks and financial institutions are not willing to invest their fund in the low-yielding government securities, the PDBL member said, adding that most PD banks are unable to meet their underwriting obligation.

"Since the yield of the government securities is lower than the prevailing interest rate in the money market, the institutional investors as well as the individuals are not interested to buy the government securities," he noted. 
He also said there is no significant initiative to create an active secondary securities market as found in India, Sri Lanka and Pakistan. 

The central bank earlier selected 15 PDs -- 12 banks and three NBFIs -- to deal with the government-approved securities in the secondary market. 

The PDs will subscribe and underwrite primary issues and make secondary trading deals with two-way price quotations.

The Daily Financial Express/Bangladesh/ 15th Jan 2012