Commercial banks' stock-market subsidiaries lament that their activities on the capital market got squeezed for alleged arm-twisting through central bank's prohibitive watch against overexposure.
Operators of the subsidiaries and their parent organisations said such shrinkage in their stock-business operations stems from the Bangladesh Bank's monitoring over the banks' share-market-exposure limits on consolidated basis.
Several subsidiaries said despite the banks' share-market exposures remaining within the stipulated limit as per the law governing bank companies, the central bank further issued a circular regarding the monitoring of exposure on consolidated basis that combines banks and their subsidiaries' accounts on stock-market operations in calculating.
"The central bank can relax its monitoring on consolidated basis as there is nothing in this regard in the Bank Companies Act," said Md Sayadur Rahman, president of Bangladesh Merchant Bankers Association (BMBA).
Mr. Rahman, also managing director of EBL Securities, said banks got into problem as their exposure limit on consolidated basis included subsidiaries' total investments, including margin loans.
"It's not justified to include the subsidiary's investments into bank's exposure on consolidated basis as the subsidiaries are separate entities and regulated by the securities regulator," he said, adding that consolidated calculation is a big restriction on expansion of capital market.
On solo-basis calculation set as per the latest amendment to the Bank Companies Act, the banks are allowed to invest in the capital market up to 25 per cent of their respective paid-up capital, statutory reserves, retained earnings and share premium.
And the banks can invest up to 50 per cent of different components, including the subsidiaries' total investments and margin loans, as per the circular regarding exposure on consolidated basis. In solo calculations, the subsidiaries' total investment and margin loans are not included.
Talking to the FE, an official of the Bangladesh Bank (BB) said the circular regarding monitoring banks' exposure on consolidated basis was issued in February 2014 following the relevant ministry's suggestion to fulfill a condition set for implementing the Capital Market Development Project-II (CMDP-II).
He said while implementing the CMDP-II by the securities regulator, the central bank was not willing to issue circular regarding the exposure on consolidated basis considering its overall viability.
The securities regulator implemented the CMDP-II with a fund worth $300 million provided by the Asian Development Bank (ADB).
"The ADB suggested setting a bank's exposure to capital market at 40 per cent of the components on consolidated basis. But the BB expanded the limit, setting it at 50 per cent, considering relaxation of banks," the BB official said.
He noted that consolidation concept is not something new as the banks have to keep capital as per BASEL-I and BASEL-II requirements.
He also said the problem arose when the banks' miss-reporting regarding their exposure to the capital market came under scrutiny.
Recently, the central bank strengthened the monitoring of commercial banks' exposure to share market with a view to avoiding recurrence of an 'unwanted situation'.
Later, the BB fined seven commercial banks for their recent share-market activities violating the 'legal sanction'.
Asked, a senior official of the Bangladesh Securities and Exchange Commission (BSEC) said the condition of maintaining market exposure on consolidated basis was imposed subject to the then situation.
"The condition was imposed through a circular. A circular can be revised time to time in the light of necessity," the BSEC official said.
He mentioned that the securities regulator earlier had proposed excluding the banks' investment made in open-end mutual funds (MFs) from the list of exposure components.
"But the BB is yet to consider our proposal despite the fact that open-end MFs are not listed," said the BSEC official.
The managing director of another leading bank's brokerage firm made a point that the subsidiary companies got capital from parent companies following approval from the central bank. And the parent companies expect returns from subsidiaries.
"But it's difficult for subsidiaries to pay return as they are unable to expand their market operations due to monitoring on consolidated basis," said the MD about the restrictions binding banks' share-market business.
He claimed the exposure calculation on consolidated basis is not logical as the banks are compliant as per the Bank Companies Act.
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