Provisioning shortfall against negative stock equity hits Tk7,824cr

The provisioning shortfall of merchant banks and brokerage houses against negative equity in the capital market reached Tk7,862 crore as of October last year. 

Brokerage houses linked to the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange, as well as merchant banks, have provisioned only Tk2,701 crore against the total negative equity of Tk10,525 crore. 

The deadline for the optional facility to provision against negative equity expired on 31 December. The DSE Brokers Association (DBA) has requested an extension of the provision deadline until 2030, instead of the current step-by-step provisioning.

Sources say brokerage houses and merchant banks have failed to make provisions despite multiple extensions since 2016. 

In response, the Bangladesh Securities and Exchange Commission (BSEC) has written to the finance ministry, urging a swift decision on negative equity. 

The letter outlines the status of margin loans and negative equity as of 31 October 2024, noting that market stability cannot be achieved without writing off the existing negative equity. It calls for immediate financial measures, margin loan reforms, and increased investor awareness.

In the letter, BSEC stated, "The 2010 market debacle caused unrealised losses to accumulate as margin for investors, which have been carried forward as negative equity for an extended period." 

Despite ongoing discussions with market intermediaries and various initiatives by the commission, the negative equity situation has not improved. The letter further noted that BSEC had previously instructed market intermediaries to provision for unrealised losses to eliminate negative equity, with the deadline passing on 31 January this year. 

BSEC has now requested the ministry's intervention and called for a meeting on the issue. The regulator hopes that the cooperation and guidance from the Financial Institutions Division will help resolve the negative equity problem.

A BSEC official told TBS, "The deadline for provisions against negative equity expired on 31 January. Institutions must now provision again for unrealised losses." 

Several brokerage houses have requested an extension of the deadline, but instead of granting it, BSEC has sought the assistance of the Financial Institutions Division for a long-term solution, he said. 

The official warned that without resolution, there will be no improvement in the financial condition of brokerage houses, and investors will continue to bear the burden of negative equity.

As of 31 October 2024, the total margin loan given to investors from 1.74 lakh margin beneficiary owner (BO) accounts by DSE and CSE member brokerage houses and merchant banks stands at Tk18,128.70 crore. 

Of this, DSE member brokerage houses have provided Tk11,545 crore, merchant banks Tk6,547 crore, and CSE brokerage houses Tk35 crore. Against this margin loan, the total negative equity is Tk10,525 crore, with Tk7,862 crore as principal margin equity and Tk2,663 crore as interest. 

The negative equity of DSE brokerage houses is Tk5,145 crore, with interest of Tk1,191 crore, bringing the total negative equity to Tk6,336 crore. These brokerages have made a provision of Tk1,458 crore. The negative equity of CSE brokerage houses is Tk30 crore, consisting of Tk9 crore principal equity and Tk21 crore interest.

BSEC-approved merchant banks have provided Tk6,548 crore in margin loans, with actual negative equity of Tk2,709 crore and interest of Tk1,451 crore. The total negative equity of the merchant banks stands at Tk4,159 crore, against which they have made a provision of Tk1,239 crore.

In December last year, stock brokers proposed a six-year extension, until 2030, to gradually maintain provisions against negative equity and unrealised losses in the capital market. 

Brokers and merchant banks have been using optional facilities to maintain provisions in clients' margin accounts and brokers' dealer accounts since 2016, with extensions granted by the BSEC.

The fifth extension expired on 31 January 2025. In early December, the DSE Brokers Association proposed in a letter to the BSEC that no further extensions be allowed beyond 31 December 2030.

The proposal includes a step-by-step provisioning plan: 5% in 2025, 10% in 2026, 15% in 2027, 20% in 2028, 25% in 2029, and the remaining 25% in 2030.

The association also proposed that no additional margin loans be provided to accounts with negative equity to prevent market intermediaries from exploiting the provision relaxation. It suggested that interest accrued from negative equity accounts should not be counted as part of the company's income. 

Additionally, the association recommended introducing a rule for shares purchased by directors using margin loans, similar to practices in the USA. This would allow brokers and merchant banks to liquidate the margin loan without approval when a margin call is triggered. 

The proposal stated that shares owned by directors should remain locked and require stock exchange approval for liquidation, including when bought using margin loans.