Banks asked to report on progress of fund creation for stock investment

The securities regulator has asked all listed banks to inform it about the progress on forming a special fund for investing in the ailing stock market.

The Bangladesh Securities and Exchange Commission (BSEC) on June 30 sent a letter to the managing directors of banks, seeking progress reports within seven working days.

The banks will have to report to the regulator the status of their investment in stocks from February 10 to June 28, 2020, according to the instruction.

In the letter, the BSEC said the government and the Bangladesh Bank have taken significant initiatives to improve the liquidity position, as well as sustainable development of the capital market, against the backdrop of the Covid-19 pandemic.

Sources said 14 banks have already created a combined Tk1,650 crore fund for the purpose. The banks have taken approval from their boards but are yet to invest.

Earlier on February 10, the Bangladesh Bank in a circular asked the banks to form a special fund of Tk200 crore each to invest in the capital market for the next five years.

This amount will not be calculated with the regulatory limit of 25 percent of their capital.

The decision was taken to increase liquidity supply in the stock market through banks' investment.

The banks were also given exemption from maintaining provisioning against the investment.

The initiative has opened up an opportunity to bring fresh investment of Tk12,000 crore from all 59 banks in the country. The investment opportunity will remain open until January 13, 2025.

This move comes after the prime minister's instruction to take long and short-term measures to boost the stock market.

As of December last year, banks' individual exposure to the stock market was 11 percent on average, far lower than the regulatory limit of 25 percent, according to the Bangladesh Bank.

Banks can build up the fund from their own source or take the money from the central bank through repo at 5 percent rate.

They can lend this money to their subsidiaries, such as merchant banks and brokerage houses, at 7 percent interest rate.

The tenure of these kinds of loans will end on February 9, 2025. Such loans will not be considered with the banks' advance deposit ratio.

The central bank also imposed some conditions about which kind of shares banks can invest the money on.

They are not allowed to purchase shares of their own company with this money. They can purchase shares not more than 2 percent of other banks and financial institutions and 10 percent of other companies.

Furthermore, banks cannot purchase more than 10 percent units of a closed-end mutual fund and 15 percent of an open-end mutual fund.

They can invest only in companies and mutual funds which have been making profits for the last three years.

Earlier in September 2019, the central bank offered liquidity support to banks at only 6 percent interest to invest in shares.

In 2010, the banks' overexposure contributed to a boom in price indices in the capital market. And the banks were allowed to invest 10 percent of their liabilities.

Later, the government amended the Bank Company Act in 2013, limiting the banks' exposure to 25 percent.