Stock market suffers from liquidity crisis

The turnover at the Dhaka Stock Exchange (DSE) has nosedived to the lowest in the last 20 months as the market is suffering from a liquidity crisis.

Market stakeholders have attributed the crisis to the floor price, lack of confidence, inflation, and liquidity crisis in the financial sector.

On Sunday, the turnover at the country's premier bourse fell by 35% to Tk313 crore compared to the previous trading session. Earlier, the lowest transaction was Tk235 crore on 5 April 2021.

DSEX – the board index of the DSE – dropped by 20 points to 6,224 compared to the previous day.

And among the companies and mutual funds traded, 22 scrips advanced, 64 declined, and 214 stayed the same. Also, 301 scrips are stuck at the floor price.

Richard D' Rozario, president of the DSE Brokers Association of Bangladesh and the managing director of Global Securities Ltd, told The Business Standard, "New investments are not being made in the stock market due to the floor price imposed by the regulator."

Owing to high inflation brought on by the Russia-Ukraine war, the stock market fell sharply. To prevent this fall, the Bangladesh Securities and Exchange Commission (BSEC) imposed the floor price on 29 July. Now no share price can fall below the floor price.

BSEC feels that if the floor price is lifted, general investors will lose their capital. Those who have invested with loans will be the losers in particular.

Abu Ahmed, stock market analyst and former economics professor at the University of Dhaka, told TBS, "If the floor price is withdrawn, the market may fall due to an economic crisis. But it will turn around again. Artificially fixing the share price is not the solution."

A top official at a brokerage firm said that due to the liquidity crisis in the financial sector, loans are not available from banks for investment in the stock market.

"Instead, banks have now issued notices for the repayment of loans that were taken under the credit limit. In this situation, institutional investors are not able to remain active," he added.

Meanwhile, panicked customers have withdrawn crores of taka following a recent "rumour" on liquidity crisis in banks. 

At an event on Saturday, prime minister's Principal Secretary Ahmad Kaikaus said, "There was a real impact after it was said that there is no money in banks. People have withdrawn about Tk50,000 crore."

The Bangladesh Bank data also said the excess liquidity in banks was Tk2.03 lakh crore at the end of June this year but fell to Tk1.69 lakh crore in October.

"The growth in deposits amid the inflationary pressure was much slower than that of loans during the time, which resulted in a fall in liquidity," a central bank official, wishing to remain unnamed, told TBS.

One of the reasons for the decrease in excess liquidity in the banking sector is the purchase of dollars by commercial banks from the central bank.

The central bank said that up to October of the current fiscal year, $5.58 billion was sold to public and private commercial banks from reserves. According to that, about Tk53,000 crore has gone to the vault of the central bank from the banking system.

However, Richard D' Rozario said, "Every year during the year-end, there is pressure from banks and non-bank financial institutions to withdraw money from the stock market. Therefore, there is no scope to say that the effect of the ongoing liquidity crisis in the financial sector is on the stock market."

But in 2022, DSEX lost over 600 points and daily turnover remained low throughout the year.

Bangladesh Merchant Bankers Association President Sayedur Rahman said, "It cannot be said precisely whether the liquidity crisis has affected the stock market. Because when the market is good, people invest even by borrowing. And when there is a slowdown, they sell shares and move away."

In 2021, DSE's benchmark index rose 20% or 1,138 points. According to Bangladesh Bank data, banks invested Tk8,346 crore in the stock market that year which is 58% higher than in the previous year. And in 2021, DSE's daily turnover touched around Tk2,500 crore.

In this situation, the Bangladesh Merchant Bankers Association has sought policy support from the Bangladesh Bank to increase institutional investment capacity in the bear market.

That includes relaxing the single borrower exposure limit in lending to banks' own subsidiaries for investment in the stock market, reducing provision against the loan to 1% from 2% and suspending consolidated capital market exposure reporting.