BB extends liquidity support to prop up stocks | The Daily Star
12:00 AM, September 23, 2019 / LAST MODIFIED: 12:43 AM, September 23, 2019

BB extends liquidity support to prop up stocks

Bangladesh Bank yesterday announced liquidity support for banks with a view to ramping up their capacity to invest in the capital market as part of a concerted effort to arrest the ongoing bear run.

Between June 27 and September 22, DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), sank 511 points, or 9.41 percent, to 4,920 -- which is well below the psychological 5,000-mark -- and investors lost Tk 28,892 crore.

The liquidity support will be provided in the form of Repurchase Agreement (repo), a form of short-term borrowing by banks from the central bank by placing government securities as collateral securities, as per the BB notice sent out to all lenders.

Lenders will have to count 6 percent interest rate to enjoy the liquidity support through repo. The repo will be for 28 days but the fund will be extended for six months.

The liquidity support extended to banks will be equivalent to 95 percent of the value of the treasury bills and bonds they present to the central bank. The lenders, whose investment volume is below the central bank ceiling, will get the support.

The Banking Companies Act 1991, which was amended in 2018, has limited a bank’s stock market exposure to up to 25 percent of its capital.

The capital includes paid-up capital, share premium, statutory reserve and retained earnings.

But the investment ceiling goes up to 50 percent if the banks’ subsidiary companies’ capital is considered.

Banks will have to open fresh beneficiary owner account to invest the fund through their own portfolio. They will have to apply to the central bank within the next three months.

“This is a good initiative to make the capital market more vibrant, but the other stakeholders also will have to play their due role,” said Syed Mahbubur Rahman, chairman of the Association of Bankers’ Bangladesh, a forum of the managing directors of private banks. The Bangladesh Securities Exchange Commission will have to ensure good governance so that no stockholder violates the rules and regulations, said Rahman, also the managing director of Dhaka Bank.

Banks will enjoy additional fund to invest in the capital market because of the latest central bank move, said Shafiqul Alam, managing director of Jamuna Bank.

Dhaka and Chattogram stock exchanges should take initiatives as well to bring back investor confidence, he said.

Faruq Ahmed Siddiqi, a former chairman of BSEC, said the initiative may impact the market positively for a few days but it will not have any long-lasting effect.

For long-term impact, the government will have to curb manipulation in trading by way of ensuring transparency and restoring investor confidence. “Ensuring good governance in the stock market is now the vital thing.”

Even those banks that have adequate liquidity and room to invest are reluctant to invest in the stock market. “So how can we think that the banks will invest there after getting funds from the central bank at 6 percent interest?”

A director of the DSE, however, said such a decision will have a positive impact on the market as banks will be able to get their needed funds.

On the other hand, general investors will regain their confidence, he said, wishing not be named.




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