Bangladesh Bank offers banks low-interest loan for investing in ailing stock market

Experts sceptical about sustainable market revival

HM Murtuza | Published: 00:00, Sep 23,2019

 
 

A file photo shows investors monitoring share price movements at a brokerage house in Dhaka. Bangladesh Bank on Sunday created scope for borrowing by banks low-interest fund directly from the central bank for investments in stocks amid turmoil in the capital market. — New Age photo

Bangladesh Bank on Sunday created scope for borrowing by banks low-interest fund directly from the central bank for investments in stocks amid turmoil in the capital market.

Bankers and experts welcomed the BB move to restore investors’ confidence, but were sceptical about effectiveness of such temporary funds in ensuring a sustainable revival of the capital market that has been facing free fall since mid-January this year.

Instead, they suggested ensuing good governance at the capital market — from stockbroker to regulator — and enlisting of quality scrips by lessening procedural complexities for attracting investors’ attention to the market.

To rescue the market from free fall, a circular issued on Sunday said that the banks would be allowed to borrow from the central bank in the form of Repurchase Agreement (REPO) at the rate of 6 per cent interest specifically for investments in the capital market.

Initial repayment tenure has been set at 28 days and the tenure would be extended to six months, the BB circular said, adding that the banks would have to apply for such fund within three months.

There would be no requirement of participating in the bidding process to avail the fund for investment in the capital market.

In the three months, the central bank would provide banks funds until they reach their capital market investment limit set by the central bank.

Banks would only be allowed to use the funds for investments through their own portfolio and their subsidiaries.

Opening new beneficiary owners’ account has been made mandatory for investing the money through the banks’ own portfolio or through their subsidiaries’ portfolio.

The BB would issue the credit facility to the banks against their assets like treasury bills and bonds which they were holding as their investments.

The banks, however, would not be allowed to invest in the capital market in excess of the BB-set limit.

Sunday’s BB circular said that the majority of the banks had their advance-deposit ratio under the BB-set limit and excess liquidity even after complying with statutory liquidity ratio.

Those banks have adequate scope for investing in fundamental scrips by keeping their capital market exposure within the legal limit, it said.

The Banking Companies Act 1991, which was amended in 2013, limited a bank’s stock market exposure to up to 25 per cent of its capital on solo basis and 50 per cent of its capital on consolidative basis. The capital includes paid-up capital, share premium, statutory reserve and retained earnings.

Keeping the risk factors into consideration, the banks have scope for making such investments and thus supporting the liquidity supply to the capital market along with ensuring a vibrant capital market, the BB said.

A BB official said that the banks’ overall investments in the capital market had just reached around 14 per cent of the regulatory limit, leaving ample scope for investing in the market by the entities.

By utilising the unused capacity to invest in the capital market, the banks could inject another Tk 3,000 crore through their own portfolio or through their subsidiaries’ portfolio by giving loans to the subsidiaries.

On September 19, the key index of Dhaka Stock Exchange, DSEX, dropped to 4,855.98 points, the lowest since December 6, 2016, due to fading confidence of investors in the market.

Mentioning the BB move as giving ointment to an ailing capital market, AB Mirza Azizul Islam, former adviser to an interim government, however, welcomed the BB move amid the market woes.

Expressing scepticism, Azizul said, ‘Unless the basic problems — lack of good scrips in the market and market manipulation — are solved; such measure would not be able to bring any a long-lasting solution [to the market woes].’

Association of Bankers, Bangladesh chairman Syed Mahbubur Rahman told New Age, ‘It’s a prompt and timely move of the central bank and would impact positively on the capital market.’

He, however, said that such measure would not be enough for sustainable growth of the capital market unless the due role of the stock exchanges as well as the Bangladesh Securities and Exchange Commission was ensured.

‘Earlier, we have witnessed such injection of fund in the capital market. Those initiatives only brought some temporary improvement in the market situation but failed to sustain in the long run,’ he said.

For ensuring long-term and sustainable improvement of the capital market, the good governance must have to be ensured in the market along with ensuring enlistment of quality scrips on a regular basis, he said.

For binging well performing companies to the capital market, the listing procedure must be made convenient, otherwise such companies would not come, he added.

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