Banks allowed to offer loans against govt bonds

Bangladesh Bank (BB) has allowed banks to offer loans to clients against Treasury Bonds (T-bonds) held under lien, according to a circular issued today.

A lien is a legal right or claim that a lender has over an asset (the T-bonds) belonging to a borrower.

The move comes after banks expressed interest in offering credit facilities backed by T-bonds, as bonds placed under lien have now been recognised as eligible collateral.

The central bank said that before extending any overdraft or term loan, the relevant T-bonds must be duly marked as “lien” by the lending bank.

Under the directive, lenders may finance up to 75 percent of the bond’s face value.

However, the outstanding loan amount must not, under any circumstances, exceed the face value of the bond due to the accumulation of interest or profit, charges, or fees, the BB added.

The regulator further stipulated that the tenure of the loan facility must not exceed the maturity period of the bond.

It also prohibited banks from extending any form of financing or facility intended to facilitate the purchase of T-bonds.