Banks will get till December 2023 to adjust excess stock investments
Banks will now get till the end of 2023 to adjust their additional investments in the stock market as the Financial Institutions Division has consented in its favour.
The Division has agreed to allow the time upon a 12 October letter from the Bangladesh Bank to this end.
In its letter, the Financial Institutions Division also said that banks' excess stock investments until 31 August 2022 cannot be increased in any way.
Keep updated, follow The Business Standard's Google news channel
Now the Bangladesh Bank is expected to issue a circular by extending the time.
Seeking anonymity, a central bank official said on 4 August this year the Bangladesh Bank issued instructions to calculate banks' stock investments based on the cost price instead of the market price of their shares.
"In this, the investments of several banks have been found overexposed. And if this investment is brought down to the prescribed limit, the stock market index is falling. Banks also have to count losses. So the banks requested time to adjust the limit," he added.
In view of this, the Bangladesh Bank has decided to give time till the end of 2023 for adjusting additional investment to keep the market stable by reducing the excess selling pressure and avoiding losses to investors, said the central bank official.
In 2013, the Bangladesh Bank set banks' investment limit in the stock market considering risk management. According to that directive, no bank can invest more than 25% of its equity in the stock market unless it has a subsidiary company. And banks having subsidiary companies can invest up to 50% of their equity.
As per rules, a bank can hold onto a single company's shares valued at up to 10% of the bank's paid-up capital and up to 5% of its total capital.
The chief financial officer of a private bank said that many banks had bought shares at a high price. So they are in trouble due to the calculation of investment limit at cost price. It has become difficult to adjust accounts in a short period of time, especially for banks that have large investments in subsidiary companies.
"Banks will be relieved if the one-year time extension is given now. Again, there will be no negative impact on the stock market for this extension," he added.
According to sources at the Dhaka Stock Exchange (DSE), the main index of DSEX rose by 288 points or 4.56% to cross 6,600 points within a month of issuance of the circular regarding the calculation of investment limit at cost price. But when the calculation of the exposure limit at cost price was implemented, the stock market faced selling pressure again. The index fell by 250 points.
Since the 2010 market collapse, people related to the capital market have been demanding to consider the cost price of the shares in the calculation of the stock investment limit of banks. It has been discussed for more than a long time.
Earlier last year, the Bangladesh Bank fined Southeast Bank and NRB Commercial Bank for overinvestment in the stock market. Besides, EXIM Bank and Premier Bank were fined due to irregularities in the use of the central bank's special fund of Tk200 crore to support the stock market. Eastern Bank, Union Bank, Global Islami Bank and Agrani Bank were warned over the same charges.
