Another Tk 1,863cr bank fund for stock market

Bank funds amounting to Tk 1,863 crore are headed for the stock market as the investors are deeming it a better mode for gaining higher, cost-effectiveyields compared to other forms.

Some 26 banks have formed funds of around Tk 2,900 crore utilising a Bangladesh Bank incentive. Of the funds, around Tk 1,037 crore has already been invested.

On February 10, the banking regulator rolled out the package that allows banks to set up a Tk 200 crore fund by taking it from Bangladesh Bank through a repurchase agreement against treasury bills and bonds they own.

The banks will have to pay 5 per cent interest for the fund and the credit tenure will be up to February 2025.

Such investments by banks may give a boost to the stock market, which is already showcasing an upward trend, opined AB Mirza Azizul Islam, a former caretaker government finance and planning adviser, yesterday.

However, investing in stock markets is not the primary function of banks, so they should focus on lending money to the real economic sector, he reminded.

As banks' credit growth is falling, they are searching for other sources of income, said Islam, also a former chairman of the Bangladesh Securities and Exchange Commission (BSEC).

This is not a serious problem but banks should not invest too high of an extent, he said. Private sector credit growth decreased to 8.32 per cent in the first month of 2021 from 8.37 per cent a month earlier.

Banks are now enjoying a huge amount of liquidity but demand is scarce, for which they are investing funds in the stock market, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

The surplus liquidity stood at Tk 204,070 crore as of January, a year-on-year surge of 97 per cent. The amount stood at Tk 103,358 crore in the same month a year ago.

Meanwhile, the market has been faring comparatively well in recent times, he said, adding that the stock market regulator's activities gave banks the confidence to make prompt investments.

"Trade and demand are low, so we have to think of other ways of generating income because we have costs to bear against the excess liquidity," Rahman added while talking to The Daily Star yesterday.

As banks' core business of lending money has been yielding low profits due to the interest rates being capped to single digits, they are trying to invest in other sources of income, said a top official of another bank preferring anonymity.

Banks' earnings can be summarised as income from interests, investments (treasury bills and stock market), commission and charges.

Abiding by a government order, the Bangladesh Association of Banks (BAB) decided to bring down the deposit rate to 6 per cent and lending rate to 9 per cent from April 1, 2020.

The contribution of investment income rose to a higher extent in 2020 because banks are already starting to invest in treasury bills, bonds and the stock market, he said.

Banks' investment in bonds and other securities rose 8.84 per cent to Tk 314,747 crore in the second quarter of last year. Investment income surged Tk 842 crore, or 49 per cent, to Tk 2,546 crore in the quarter.

As the interest rate of treasury bills and bonds was high and banks did not need to keep provisions against the investment, it was better to invest into these instruments, said the banker.

However, the government reduced the interest rate on treasury bills and bonds to 8.1 per cent from 9 per cent.

So they are availing the central bank's incentive package to make money from the stock market, the banker added.