The Bangladesh Bank has issued a show-cause letter to state-owned Sonali Bank Ltd for overexposure to the capital market.
The bank has exceeded the exposure limit of 25% by providing a loan of Tk500 crore to state-owned Investment Corporation of Bangladesh (ICB).
The ICB will invest the fund in the capital market.
In this way, Sonali Bank has invested 26% of its capital in the stock market.
Earlier, the Bangladesh Bank limited a bank's stock market exposure to up to 25% of its capital that includes paid-up capital, statutory reserve, share premium, and retained earnings.
The central bank has recently fined Southeast Bank Tk10 lakh for overinvestment in stocks of a single company, violating the banking company law.
In September this year, the Bangladesh Bank asked the bank to bring down its investment within the authorised limit, but it did not follow the central bank's instructions.
Previously, the central bank fined four banks – the NRB Bank, NRB Commercial Bank, Exim Bank, and Premier Bank – for violating rules concerning stock investment.
Another four banks were warned of having their access to the special liquidity support package suspended if any further violation was found in future.
The banks are Eastern Bank, Union Bank, Global Islami Bank, and Agrani Bank.
Prices of junk and small-cap shares increased unusually without any fundamental reason or improvement in financial health or dividend declaration, which reflects that there was manipulation.
The central bank's findings indicate that banks were behind the unusual hike of junk share price in the last one year.
The stock market remained vibrant over the last one year when the overall economic activities were stagnant. Share prices of 140 listed companies, mostly small-cap and junk ones, increased by 100%-1,200% in the last one year, putting retail investors at risk.
But the price indices of the Dhaka Stock Exchange (DSE) slowed down after the Bangladesh Bank had started to take stern action against overplay of banks in the stock market.
The average daily turnover on the country's premier bourse came down to Tk1,000 crore in November from above Tk2,000 crore in October. The DSEX index came down below 7,000 in November.
But the Bangladesh Securities and Exchange Commission (BSEC) opted out of its stance to reduce margin loans from 80% to 50% as soon as the key stock market index went above 8,000 points.
Now, broker and merchant banks can provide margin loans up to 80% of their clients' equity against all the marginable securities having a price to earnings ratio of up to 40 no matter where the index is.