12:00 AM, December 12, 2012 / LAST MODIFIED: 12:00 AM, December 12, 2012

Govt to follow IMF recipe for banks' stock exposure

The limit may be set at 25pc of their capital

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Rejaul Karim Byron

In line with an IMF prescription, the government has decided to set the exposure limit of a commercial bank in the stockmarket at 25 percent of the bank's total capital.
A finance ministry official said the changes will be included in the draft amendment to the Banking Companies Act.
However, the government wanted the exposure limit to be at 40 percent of a bank's total capital. The existing exposure limit of a bank is 10 percent of its deposits.
A team of the International Monetary Fund came to Dhaka recently to review the implementation of the lender's conditions tagged with the release of the second instalment of its $1 billion loan.
The finance ministry official said the amendment to the Banking Companies Act will be passed in parliament in March.
Once the amendment gets passage in parliament, the central bank will give the banks two years' time to reset their stock exposure limits.
Various quarters blamed the stockmarket debacle in 2011 on the banks' higher stock exposure.
Banks saw falling profit and rising defaulted loans this year.
Several bank officials said higher stock exposure of banks has caused their defaulted loans to go up, which ultimately pulled down their profit.
Bangladesh Bank had long been asking the government to tag the stock exposure limit of banks with their capital, instead of deposit.
But due to pressure from some vested groups, the government had been avoiding the central bank's suggestion.
After the debacle early last year, a stockmarket probe committee led by Krishi Bank Chairman Khondker Ibrahim Khaled had also suggested the banks' stock exposure limit at 25 percent of their capital, which is also a global standard.
The government-formed committee to scrutinise the draft amendment to the Banking Companies Act recommended such limit at 40 percent of the banks' capital.
However, the banks' scope to invest in the stockmarket will remain high despite the amendment, as the banks have a strong capital base now.
After the amendment, banks will be able to raise their stock investment up to more than Tk 14,000 crore.
According to BB statistics, the amount of total capital in the banks was Tk 56,201 crore in June.
When the stockmarket was booming in 2010, the banks' investment in stocks was around Tk 16,000 crore.
An official of the central bank said the banks' capital has grown much in the recent times in line with the Basel-II requirements, but their capital will increase further when Basel-III will take effect soon.
According to BB statistics, the total capital of the banks was Tk 20,578 crore in 2008.
The banking sector has witnessed an increase of Tk 35,623 crore in their capital in the last four years.
It means the overall capital growth has been 173 percent over the last four years with an annual average growth of about 49 percent.

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