Banks get another year to adjust

The Bangladesh Bank has allowed banks to adjust their overexposure to the capital market by the end of December next year.

It issued a circular on Monday, in which the Financial Institutions Division (FID) gave its consent to a proposal made last month.

The FID said banks had been given extra time, taking into account the market’s stability and ways to reduce investors’ losses.

Banks with overexposure will not be allowed to increase their investments from what was calculated till August 31 this year.

As per the Bank Company Act 1991, banks can invest in listed securities up to 25 per cent of their equity on a solo basis and 50 per cent on a consolidated basis.

Earlier on August 4, the central bank allowed banks to calculate their stock market exposure at cost prices with immediate effect. The Bangladesh Securities and Exchange Commission and the relevant stakeholders had been trying to introduce that for a long time.

On February 10, 2020, the Bangladesh Bank approved banks’ formation of a Tk 200 crore special fund to invest in the stock market, which would not be included in the calculation of the capital market exposure limit.

The fund would remain in place until February 2025, and banks could take advantage of the loans until January 13, 2025.

In a recent letter, the BSEC said the investor base in Bangladesh’s capital market is mostly dominated by retail investors, who account for as much as 80 per cent of the total number of investors.

It is expected that institutional investors will dominate trading activities instead of retail ones to improve the stability of the country’s stock market, the BSEC letter read.

Currently, banks and non-bank financial institutions are allowed to invest 25 per cent of their capital in the stock market, which is called the exposure limit. The calculation of the exposure limit is based on the cost price instead of the market price.

Earlier on February 15, the Bangladesh Bank specified the non-bank financial institutions’ (NBFIs) investment components that would be considered their capital market investments.

The Banking Company Act 1991, amended in 2013, allows a bank’s stock market exposure to be up to 25 per cent of its total capital, which includes paid-up capital, share premium, statutory reserve, and retained earnings.

The Financial Institutions Act 1993 specifies the NBFIs’ investment limit in shares of other companies, but it does not say which investment components would be considered their capital market investments.

There are currently 61 scheduled banks across the country. Of these, 34 are listed on the stock exchanges. All banks have been asked to provide information on investments in the stock market.