Govt body for investing 40pc of banks’ capital in stocks

The Financial Express, 31 July 2012

A government committee has recommended allowing the commercial banks to invest 40 per cent of their capital in the share market instead of 25 per cent, as proposed by the central bank, officials said Monday.

Currently, the banks can invest up to 10 per cent of their total liabilities in the capital market.

The Ministry of Finance formed the seven-member committee, headed by former secretary A K Abdul Mubin, to amend the Bank Companies Act 1991 for minimising risk and ensuring good governance in the country’s banking sector.

The committee has been asked to examine the changes proposed by the Bangladesh Bank (BB) in a draft of the Bank Company (Amendment) Act 2012.

The committee has recommended higher investment in the share market by the banks, considering the overall situation of the country’s capital market.

“We expected that the higher investment by the banks will help bring back stability in the country’s capital market through restoring confidence among small investors,” Mostofa Azad Chowdhury Babu, a member of the committee, told the FE.

During the recent months the country’s stock market has been in a bad shape, in terms of market capitalisation of the listed issues, leading to a sharp decline in the indices.

The benchmark index of the Dhaka Stock Exchange (DSE) – the DGEN – came down to 4159,17 points on July 30, 2012 from its highest of 8918.51 points on December 05, 2010, the DSE data showed.

The committee believed that the banks’ financial base is strong enough to invest more in the share market, added Mr. Babu, also vice-president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).

On the other hand, the central bank has recommended amendment to the regulations relating to the banks’ capital market investment to minimise risks, the officials said.

The banks should not be allowed to invest in the share market more than 25 per cent, in any form, of their total capital, the BB said in its proposal for the Bank Company (Amendment) Act 2012.

“We’ve proposed the exposure limit as the threshold for the banks,” a BB senior official told the FE, adding that the central bank has recommended the investment limit considering their financial risk.

The central bank earlier estimated that if any bank invests 10 per cent of its deposit and if the share prices slide by 25 per cent from their purchase price, the bank’s capital adequacy ratio will decline by a minimum of 2.0 per cent.

At present, the banks are allowed to invest 10 per cent of their liabilities (deposit) in the share market in line with the section 26 (2) of the Banking Companies Act 1991.

Under the existing rules, holding of equity share in any form should not exceed the approved limit. Additional or unauthorised amount of holding will be deducted at 50 per cent for Tier-1, generally known as core capital, and 50 per cent from Tier-2, generally known as supplementary capital.

BB clarifies banks’ bond investment

The Daily Star, 31 July 2012

Bangladesh Bank (BB) issued a notice on Sunday clarifying mandatory investments by primary dealer (PD) and non-primary dealer banks in government securities.

Twelve PD banks must buy 60 percent of unsubscribed T-bills and bonds and 25 non-PD banks will receive the remaining 40 percent. It means if PD banks buy all the securities on auction, non-PD banks will not have to buy any bond or bill.

The BB in a notice on last Tuesday introduced a new policy that said the PD banks will have to buy 60 percent of government treasury bills and bonds, compared to 100 percent earlier.

The non-PD institutions must accept the remaining 40 percent, according to the notice to be effective from tomorrow.

The new notice issued Sunday said non-PD banks would not be considered as PDs despite their investments in government securities, but they will get assured liquidity support from the central bank.

The banking regulator has selected 15 PDs — 12 banks and three non-bank financial institutions — to deal with the government-approved securities in the secondary market.

Currently, three treasury bills — 91-day, 182-day and 364-day — are being transacted through auction to adjust the government borrowing from the banking system. Four government bonds with five-year, 10-year, 15-year and 20-year tenures are also being traded in the market.

Meanwhile, the Federation of Bangladesh Chambers of Commerce and Industry said the involvement of non-PD banks in government treasury bills and bonds would reduce the banks’ cash for commercial investments.

“These banks will not be able to invest in the productive sector,” FBCCI said in a statement.

BB bars banks’ purchase of fixed assets

The Daily Star, 31 July 2012

The central bank yesterday imposed restrictions on purchase or lease of fixed assets, including land, by commercial banks.

Under the new rules, a bank cannot buy land, building or floor space, except for the use of its headquarters, Bangladesh Bank said in a notice. Fixed assets cannot be taken as lease for more than 10 years.

However, a bank can buy or lease floor space for its branches provided that it has approval from the banking regulator.

Different commercial banks have invested heavily in fixed assets which pushed up its prices significantly in the past few years.

“We’ve found that investments in land purchase have increased abnormally, which goes against a bank’s core business,” a senior official of the central bank said.

Earlier in 2010, Bangladesh Bank asked banks to stop financing for land purchase as an increased flow of credit to the unproductive sector is adversely affecting the economy.

SEC asks for investment information from 4 banks

New Age, 26 July 2012

The Security and Exchange Commission has asked four commercial banks to submit their stock market investment details after they published newspaper advertisements in the last few days announcing to investment Tk 1,200 crore in the market.
In separate letters the SEC on July 23 asked the banks to submit information about the names of brokerage houses which will handle their investment, whether the funds have already been submitted to any brokerage houses and in how many days the investment would be made.
The banks were instructed to provide the information by July 31.
The SEC in a statement on Tuesday asked companies not make any such investment decision public as such practice was out of securities law.
In the last few days, Pubali Bank announced to invest Tk 500 crore, National Bank Tk 300 crore and Exim Bank Tk 200 crore in the stock market.
The NCC Bank and Standard Bank also announced to invest Tk 100 crore each in the stock market.

BB decision may deepen liquidity crisis

New Age, 26 July 2012

Bangladesh Bank’s decision asking 25 non-primary dealer banks to hold 40 per cent of treasury bills and bonds on a mandatory basis would deepen liquidity crisis in the banking sector because of further increase in government’s bank borrowings, said bankers and economists.
The BB on Tuesday issued a circular to the commercial banks saying that from now on 60 per cent government T-bills and T-bonds would be disbursed among the primary dealer banks and 25 non-PD banks would hold rest of 40 per cent bills and bonds.
A BB official told New Age on Wednesday that the central bank took the decision virtually to ensure that the government could borrow more from the banking channel and the non-primary dealer banks could also take the burden along with the PD banks.
He said that the 12 PD banks had been facing an acute liquidity crisis for the last few months due to their large investment in the treasury bills and bonds to facilitate government borrowings.
BB data showed that the 15 primary dealer banks and NBFIs had an investment of Tk 22,550.76 crore in bonds and bills till April 2012 which was higher by 22.83 per cent, or to Tk 4,192.02 crore from that of December 31, 2011.
The government, on the other hand, projected to take Tk 23,000 crore from the banking sector this fiscal year.
The managing director of a commercial bank said that the liquidity situation and the profit condition of the non-PD banks might fall due to such decision of the central bank.
He said the highest interest rate on treasury bond was 12 per cent while the maximum interest rate on treasury bill is 11.25 per cent.
‘The rate on deposits is 12.5 per cent. If a non-PD bank buys government bonds with 11-12 per cent interest, its profit will definitely fall,’ he said.
For this reasons, the profit and liquidity conditions of the banks will decrease in the coming months, he added.
He said that liquidity support facility that the banks got from the BB against the T-bills was not adequate. ‘Banks get only 25 per cent of the demand they place for the liquidity support,’ he said.
The official said that although BB claimed that the decision was taken to ease the burden of PD banks, ultimately their burden might not be reduced because of excessive government borrowings.
Former BB governor Saleuddin Ahmed said that the government’s borrowing from the banking source would be expanded due to such type of decision.
He said the government had drastically borrowed from the banking source in the last financial year 2011-12.
The financial sector would fall into a harmful situation if the government continued borrowing from banks, he said.
In the present context, the invested treasury bills and bonds have turned into idle assets as the banks failed to resell the bills and bonds to individual persons or other institutions because of the absence of a secondary bond market.
He said, ‘The liquidity crisis in the banking sector may fall in a negative situation as more banks have been attached in this process.’
He, however, said the liquidity crisis in the PD banks would relax through implementing the BB decision, but the pressure on overall financial sector would not calm down.