The International Monetary Fund has objected to Bangladesh Bank鈥檚 continued lending to crisis-hit banks against unsecured promissory notes, warning that such practices violate prudential norms and could worsen inflationary pressures.
IMF officials, led by Chris Papageorgiou, raised the objection during a meeting with the central bank on Wednesday as part of the lender鈥檚 ongoing review mission in Dhaka.
The team is assessing how previous tranches of IMF funds were utilised before approving the next installment of Bangladesh鈥檚 $5.5 billion loan programme. The review will continue until November 13.
During the meeting, IMF officials questioned why the central bank has been providing liquidity support to distressed banks that lack sufficient assets or capital to survive.
Since 2022, Bangladesh Bank has extended emergency liquidity, under its 鈥榣ender of the last resort鈥� (LOLR) facility, to nearly ten financially weak banks, accepting only promissory notes as collateral.
These banks have long been struggling to meet their cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements with the central bank.
Despite this, the Bangladesh Bank continued disbursing large sums, which in some cases pushed the banks鈥� current accounts into negative balances 鈥� an unprecedented situation in the country鈥檚 banking history.
A promissory note is merely a written promise to repay a loan without any secured assets.
聽Economists reportedly pointed out that such lending effectively amounts to printing money and could heighten inflationary pressure.
In November 2024, Bangladesh Bank provided about Tk 22,500 crore in emergency funding to six commercial banks, including five Shariah-based institutions, to ensure depositors鈥� money withdrawal. National Bank also received similar support.
The Shariah-based banks 鈥� Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank, and Global Islami Bank 鈥� are widely alleged to be under the control of the controversial S Alam Group.
Under the LOLR scheme, banks can borrow from Bangladesh Bank at an interest rate of special repo rate.
Earlier in 2023, the central bank has also extended Tk 22,000 crore in liquidity support under the same method to six struggling banks.
Economists warn that such unsecured lending practices could undermine the central bank鈥檚 credibility and fuel inflation by expanding money supply without real backing.