Loan provisioning eased to boost banks' participation in stock market
To increase banks' participation in stock market investment, the Bangladesh Bank has reduced the provision from 2% to 1% against loans given to intermediary brokerage firms, merchant banks and stock dealers.
The new decision regarding credit loss provision will be effective from 30 March, said the central bank in a letter sent to the managing directors of all banks in the country Thursday.
The policy support has been given at a time when the stock market is suffering from a liquidity crisis. Consequently, DSEX – the broad index of the Dhaka Stock Exchange (DSE) – rose by 17 points or 0.27% to reach 6,294 Thursday. The DSE's turnover also jumped by 18% to Tk687.12 crore.
The central bank said as per the previous circular, banks were advised to maintain 2% general provision on the unclassified amount for loans given to brokerage houses, merchant banks and stock dealers. Now it has been decided that banks will have to maintain a general provision of 1% against such loans.
Association of Bankers, Bangladesh (ABB) President Selim RF Hussain told The Business Standard that the new rule will reduce the banks' cost in lending money to stock market intermediaries and encourage the banks to invest in the stock market.
However, on a cautious note, Selim RF Hussain, who is also the managing director of the Brac Bank, said, "Banks have their own business strategy in terms of investment. So, who will increase investment and who will not is their own matter."
Earlier, on 29 November last year, the Bangladesh Merchant Bankers Association (BMBA) requested the central bank through a letter to decrease provisioning to 1% for lending to stock market intermediaries.
In the letter, the BMBA said general provision is 1% for lending to other sectors, but it is 2% for the share market, which is discriminatory. It was discouraging banks to participate in the stock market.
"Now the banks will be willing to give us loans," BMBA President Md Sayadur Rahman told TBS on Thursday.
On condition of anonymity, a top executive of one of the country's leading brokerage firms told TBS that currently, the banks cannot grant loans as they are suffering from a liquidity crisis. Therefore, the central bank's directive may not have an impact immediately. However, it may benefit the brokerage firms and merchant banks – which take bank loans for their business – in the long term.
When the stock market started falling last year, the securities regulator imposed a floor price to prevent the decline. Former senior secretary Abdur Rouf Talukder, who took charge as the governor of the Bangladesh Bank in July last year, also came forward to support the share market at that time.
In August 2022, the Bangladesh Bank allowed non-banking financial institutions (NBFIs) to calculate their capital market exposure based on the cost of investment, instead of the market price of their held securities.
Besides, banks were given time till 31 December 2023 to adjust to the new method of calculating exposure limit.
In 2020, the Bangladesh Bank allowed banks to form a Tk200 crore special fund each by taking low-cost loans from the central bank to invest in the stock market.
According to the central bank's Financial Stability Report 2021, banks' total loan to the stock market institutions was Tk8,346 crore.
The Bangladesh Securities and Exchange Commission (BSEC) has found that within the exposure limit, banks have the capacity to invest about Tk17,000 crore in the capital market, but as of December 2022, they have invested only about Tk12,000 crore.