Stricter provisioning on losses from share, bond, and subsidiary investments by financial institutions

Infographic: TBS

Bangladesh Bank has imposed stricter conditions on provisioning against losses incurred by non-bank financial institutions (NBFIs) from investments in shares, equity, bonds and debentures, mutual funds, and commercial papers along with traditional loans.

From now on, provisioning must be made ranging from 25% to 100% depending on the category of investment, with quarterly reporting to begin from the September quarter of this year.

Previously, NBFIs only had to make provisions based on loan classification. Bankers believe this new initiative will reduce investment risks and strengthen the financial foundation of these institutions.

Bangladesh Bank issued a circular on Sunday directing all scheduled banks to comply and submit quarterly reports in a prescribed format.

According to the circular, if an NBFI invests in shares, equity, bonds, or debentures of listed companies and the market value falls below the cost price, the shortfall must be treated as an "investment loss" and provisioned accordingly.

In the case of unlisted companies (such as subsidiaries or associates), equity investments (excluding preference shares) must be valued based on the net asset value stated in the latest audited financial statements. If this value is lower than the cost price, the difference must also be provisioned as an investment loss.

If an institution invests in a company that has not published audited financial statements for three consecutive years or failed to generate profit for three years, a 100% provision must be made.

In the case of non-convertible preference shares, bonds, or debentures of unlisted companies, if no interest or dividend is paid in a given fiscal year, provisioning must be made as follows– 25% after the first year, 50% after the second year, and 100% after the third. If capital is not repaid upon maturity, 100% of the investment must be provisioned in the following fiscal year.

Dividends from listed and unlisted securities cannot be recognised as income unless received in cash.

Provisioning for investments in mutual funds must follow the "Guidelines on Commercial Paper for Financial Institutions."

Kyser Hamid, Vice Chairman of the Bangladesh Leasing and Finance Companies Association and CEO of Bangladesh Finance PLC, told The Business Standard that previously there was no guideline for NBFIs, unlike banks, regarding provisioning against losses on investments in listed/unlisted shares, bonds, debentures, mutual funds, or subsidiaries. "The new guideline addresses this gap and will help bring order to the sector."

He said provisioning used to be optional, and many institutions didn't maintain provisions on equity investments. However, top-tier NBFIs have already been following accounting standards and provisioning accordingly.

"There will be no issue for those who've been practising provisioning. But for those who haven't, this will create pressure," he said.

He added that many NBFIs weakened due to poor governance. Without a legal mandate, auditors couldn't offer opinions on investment quality, which meant financial statements failed to reflect the true financial condition of these institutions.

"Although this guideline might be burdensome at first, in the long run it will help restore discipline in the sector," he said.