Provisioning forbearance extended for dealers, merchant banks 

Highlights: 

• Stockbrokers and merchant banks can continue with only 20% of the needed provisioning 
• The move was to enable stock players to invest more instead of spending money for provisioning 
• According to the BSEC spokesperson, the relaxation would help institutions continue investing

The Bangladesh Securities and Exchange Commission (BSEC) extended provision forbearance for merchant banks and brokerage houses till the year 2025 against their unrealized losses incurred in their investment portfolio amid weak performance of price indices since the floor price was imposed.

The regulator's move was to enable stock players to invest more instead of spending money for provisioning for future risk.

However, the long-stretched provisioning forbearance helped the market intermediaries hide their weak financial health under the carpet, putting depositors' money at risk as most merchant banks and brokerage houses are subsidiaries of banks and non-bank financial institutions.

Provision is an amount set aside from income to meet future risks.

The BSEC on Wednesday said stockbrokers and merchant banks can continue with only 20% of the needed provisioning against the unrealised losses in their own capital market investments.

An investment portfolio loss remains unrealised until the investor sells the securities off at a price lower than the cost price and the international accounting standard (IAS) asks for 100% provision against such losses at the same accounting period.

However, the relaxation has been continuing against the IAS since 2016 and now has been set to stretch for a decade in a row, raising caution among observers.

It means, accounting experts said that, regulations are allowing the firms to show artificial profits or downplay their losses for years. 

When local regulations allow it, auditors are bound to okay the accounting even if it goes against IAS or builds up risks for the firms, their clients, and also for the system as a whole.

IAS needs 100% provision against unrealised losses in the same accounting period. 

BSEC Executive Director and spokesperson Rezaul Karim told The Business Standard that the regulator, upon requests from the industry, relaxed the provisioning requirement for the sake of the industry and the capital market as a whole.

When the market is facing a hard time, the relaxation would help institutions continue investing, he added.

The relaxation was only against the losses that were not yet realised and if the market bounces back, firms might not need any provisioning at all, said Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association (BMBA).

Most of the top tier firms have been maintaining their full provisioning, he said, adding that a large number of the average and small firms could not afford charging the provisioning costs due to the market condition.

"A firm that is incurring losses due to the market situation might face operational hurdles, due to the erosion of its own equity, if it is compelled for 100% provisioning," said the leader of the country's merchant bankers.

The building up risks

How much provisioning is being waived against unrealized losses is not public data, however, but it is clear that a number of brokerage firms and merchant banks are not as healthy as they look right now.

The fear is, which firm is how much strong or weak inside— the mass people are barely able or interested to look into.

Provisioning is always good as when things reverse positively, the previously charged cost comes back to the financial statement as profits, said Chartered Financial Analyst Md Moniruzzaman, managing director and CEO of a top tier merchant bank IDLC Investments.

"Our institutes have to learn a little bit of risk management. All these are happening when we are witnessing a bank run of the Silicon Valley Bank in the USA, due to the same 'unrealized losses' in their bond portfolio," said Moniruzzaman who is also the vice president of BMBA.

When Silicon Valley Bank recently failed to raise funds against its needed provisioning all its depositors rushed for withdrawal and the bank collapsed.

"Stockbroker and merchant banks don't deal with deposits," said Sayadur Rahman and their clients' investment through them is safe as those are separate accounts.

However, he did not deny the fact that being a client of a financially weak broker or merchant bank is painful as the firms lose capacity to serve well.

There is always a risk of even bigger suffering if any firm loses its integrity due to financial weakness.

Several brokerage firms, amid poor income from their business operations and own investments, have embezzled client money over the last one decade, leaving little hope of full redressing for the clients.