Sri Lanka’s central bank limits excess cash window

Mar 14, 2012 (LBO) – Sri Lanka’s central bank has capped the amount of excess cash that lenders can deposit at its standing facility on days that the monetary authority holds an auction to inject money into the inter-bank markets, bankers said. The banks can earn interest from the central bank by depositing money at the window. The monetary authority serves as a ‘central counterparty’ by accepting the money and re-lending it to others.

Each bank can now deposit only 100 million rupees at the ‘repo’ window when reverse repo auctions are held.

A ‘reverse repo’ auction is usually held when markets run short of liquidity due to forex interventions by the Central Bank.

The move will mainly affect several foreign banks which have excess cash but have exceeded overnight risk limits with other market participants, forcing them to park the money at the Central Bank’s 7.5 percent ‘repo’ standing facility.

Foreign banks, and some better managed local banks have strict risk procedures. At the start of Sri Lanka’s current balance of payments pressure in August 2011, some banks were almost always in excess by over 15 billion rupees.

The amount has since come down to around 8 to 9 billion rupees.

The excess liquidity can come down either because the money is given as loans, or because banks buy government bonds or other securities.