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Boosting stocks by providing an incentive of making loans available is not a sustainable way for reviving investors’ confidence, rather, it might lead to the creation of further risks for the banking sector, said experts on the matter.
On Monday, Bangladesh Bank announced a special package, saying each bank will be allowed to form a Tk 200 crore fund by taking financial support from it in order to invest in the stock market.
The lenders will avail the central bank funds for a five-year period at 5 per cent interest through repurchase agreements (repo) against treasury bills and bonds they own.
However, specialists believe that investing into stocks on taking loans was a risky move. Moreover, the way the loan would be recorded in the banks’ books was concerning.
Salehuddin Ahmed, a former Bangladesh Bank governor, said the banks were already in a lot of problems and adding the stock market issue on top of it would worsen the situation.
Bangladesh Bank should have kept in mind that banks deal money of ordinary citizens, not their own, and ordinary citizens want safeguarding of their money, he said, adding that investing in the stock market was not a safe move.
Giving incentives on an ad-hoc basis will not help prop up stocks for the long run as the stock market’s problems lie elsewhere, he added.
Solutions must be provided for the problems, such as the presence of a low number of stocks having good performance records and the rampant insider trading and gambling, said Ahmed.
The stock market, in terms of sustainability, will not be in a good position until fundamental changes are brought to it, said Zahid Hussain, former lead economist at the World Bank’s Dhaka office.
Companies having good performance records still do not want to come to the stock market while investors cannot differentiate between good and bad companies as they do not have trust on balance sheets being true, he said.
Moreover, the Bangladesh Securities and Exchange Commission (BSEC) “cannot run as per its wishes”, Hossain pointed out.
Only manipulators have confidence in this market and this scenario should be changed, said Hossain.
The economist said there was a cost to managing the fund and apart from this there was an interest to be paid. On the other hand, there was no certainty of making a profit from the stock market.
“So if I was a banker, I might not take the risk.”
Responding to a question, he said the banks earlier went through some bad experiences with the stock market, so none but aggressive banks might finally avail the central bank loans.
Faruq Ahmed Siddiqi, a former BSEC chairman, said he personally did not believe in providing any incentive to revive the stock index.
“Because, artificial incentives do not turn out to be sustainable, so the capital market should run on its own market force.”
If banks have an appetite to invest in the stock market but suffer from a liquidity crisis, such incentive would have a positive impact on the market.
However, many banks did not invest despite having the money and legal scope, he said.
Investing into the stock market by taking loans is quite a risky move, so it remains to be seen whether the banks will take the risk, said Siddiqi, also a former commerce secretary.
A top official of a listed bank, preferring anonymity, said they have adequate liquidity and scope to invest in the stock market.
“But our main fright is the volatile market scenario and lack of good governance in the market.”
The stock market is not a sure destination for profiting off investments as it may turn volatile at any time, so it is a tough decision when it comes to borrowing money to invest here, the banker said.
Another banker said he believes the special BB package would help the stock market only in the short term.
But this might not send out the right kind of message from the overall sense of governance, especially the way the BB has proposed keeping records of the whole package.
According to the central bank’s circular, if the price of a Tk 10 stock falls to Tk 4, banks can still show it as a Tk 10 asset. This will help banks refrain from keeping Tk 6 in provisioning.
“It would be risky for the banks because no provisioning would be required, even if the investment gets impaired,” the banker added.
In this regard, former BSEC chairman Siddiqi said the government should not distort any existing law on keeping provisioning to provide an incentive.
Such a decision may impact the banking sector negatively, for instance, if the banks do take the loans but then incur losses, he said.
A merchant banker pointed out that the BB package was giving banks a benefit of 1 percentage point, as the banks would be able to borrow money at 5 per cent interest rate whereas the repo rate was 6 per cent.
“Will scheduled banks decide to invest in the risky equity market for attaining just one percent benefit?”
Moreover, once the deposit rate of the banking sector is reduced to 6 per cent as per a government directive of December last year, then the repo rate would fall too.
The government has decided to reduce the bank interest rate to 6 per cent and 9 per cent in deposits and lending respectively from upcoming April.
A stock broker said they were hopeful of a rise in the market due to the central bank’s announcement.
But, the main problems of rampant manipulation, a lack of good governance and dearth of stocks having good performance remain. So the government should put emphasis on these, he added.
TDS