BB sees risk of stimulus loans diverting to stocks

The Bangladesh Bank fears a diversion of low-cost stimulus loans to stocks is fuelling prices on the Dhaka bourse amid the ongoing pandemic.

As it has found clues of fund diversion, it plans to issue a circular instructing banks to ensure a proper use of stimulus loans, said a senior executive of the central bank.

The development comes at a time when the Dhaka Stock Exchange (DSE) is at its best performance among Asian frontier markets, with its regulatory authority Bangladesh Securities and Exchange Commission (BSEC) overlooking the reasons behind a jump in share prices.

Rather, the BSEC has arranged a road-show starting 26 July in the US to attract investors. Doubts have already been cast over the purpose of the seven-day programme. 

A large team of the BSEC is now in the USA for this purpose.

The BB has not assigned its representative to attend the road-show even after a request from the Securities and Exchange Commission. It is annoyed at the unnecessary expenditure of foreign currency on the road-show in the ongoing global and domestic crisis, said insiders at the central bank.

Earlier in February this year, the BSEC held a road-show in Dubai.

In a primary observation, the BB found that after stimulus loans had been given as working capital, the money was withdrawn at once in some cases, not gradually, indicating diversion of the funds, said the senior executive of the central bank.

The central bank does not have specific data as to where money has been diverted to, but it thinks there is a risk of funds having been invested in the stock market.

As part of a strategy of new monetary policy for the current fiscal year that is set to be announced on 28 July, the BB will issue a warning notice about fund diversion to control money circulation indirectly, a central bank executive has said.

Through the new monetary policy, the central bank will continue implementing its expansionary stance but with more caution about money circulation to curb the rising inflation, he said.

The BB will look into possible fund diversion of stimulus loans, the BB official said, preferring not to be named.

It will also send a letter to banks to remind them that they will have to start recovering stimulus loans since the one-year tenure of such loans expires in August, and in case of a failure, the BB will take away money from the respective bank.

The central bank will start deducting 4.5% interest at which the government provided stimulus loans through banks. The interest rate of stimulus loans is 9%. Half of the interest is borne by borrowers while the other half by the government.

The government announced stimulus packages of Tk1.28 lakh crore in total, of which the BB has been directly involved in disbursing Tk1 lakh crore. 

The BB has so far provided Tk6,082 crore in interest subsidy to banks against stimulus loans of around Tk83,000 crore.

In the last one year, the private sector credit growth was 8%, which slid down to 7.55% in May, the lowest in recent history.

The trend of credit growth shows that there was little fresh lending. Stimulus loans mostly contributed to the credit growth.

Though there was no significant business expansion even after the release of stimulus loans, the DSE recorded the best performance among the Asian frontier markets in May, according to Asia Frontier Capital.

The Dhaka Stock Exchange Board Index gained more than 9.3% in May, while the key indices in the markets of Pakistan, Vietnam, China, the Philippines, Kazakhstan, Sri Lanka, Thailand, and Indonesia lagged behind it with lower gains.

Over the same month, AFC Asia Frontier Fund, which has an investment in Bangladesh, saw its net asset value going up 3%.  

Local analysts are concerned about the extra-ordinary rallies, like around a hundred percent or greater gains in a month, in the small-cap scrips at both the DSE and Chittagong Stock Exchange (CSE) and many of them believe this is taking place amid excessive speculation and a lack of regulatory supervision.