MOHAMMAD MUFAZZAL AND FARHAN FARDAUS | February 08, 2024 00:00:00
Merchant banks have been dealing with the hopeless case of negative equity since the 2010 market collapse and consider keeping the matter unsettled for at least another two years.
The Bangladesh Merchant Bankers Association (BMBA) says the lenders of margin loans could not recover the unrealised losses by 2023.
But it is unforeseeable as to when the assets, which became overvalued in the 2010 market bubble and then saw their worth quickly eroded during the crash, would return to that level.
However, merchant banks requested the securities commission to give them time until the end of next year for keeping provisions against negative equity, according to a letter sent to the commission chairman more than a week ago.
Between December 2020 and September 2023, the number of merchant banks having negative equity declined to 26 from 29 and the amount of negative equity fell to Tk 21.3 billion from Tk 30.32 billion.
The improvement happened because one company adjusted its negative balance while three others are progressing towards settling the matter by December this year.
But the letter presents the reality that most merchant banks are not even willing to keep provision against negative equity let alone make financial adjustments to bring a closure to the matter.
BMBA President Mrs. Mazeda Khatun said the regulator had exerted pressure on them not to keep any provision gap against unrealised losses, but many merchant banks' income was not good enough to comply with the instructions.
The burden of negative equity resulting from aggressive disbursement of margin loans before the 2010-11 stock market debacle has brought many merchant banks to their knees.
"That's why the merchant bankers have sought time extension for provisioning," said Mrs Khatun.
The problem seems more severe than how it looks.
Why the resistance
Negative equity that some merchant banks have been dealing with has ballooned to cross their paid-up capital, said Managing Director of Prime Bank Securities Md. Moniruzzaman.
If they adjust their negative equity, it will be tough for them to carry out business operations "as a going concern". They will not be able to get bank loans and their image to stakeholders will be at stake, added Mr Moniruzzaman.
At the same time, the merchant banks will not meet the risk-based capital adequacy requirement.
Merchant bankers emphasise that the present market situation would not be able to absorb or support any sell pressure, if conducted, from the margin accounts with negative equity.
An investor account faces negative equity when the value of assets falls below what he/she invested from their own fund, with the loan amount partly eroded as well.
Skeptical of merchant bankers' concern, Mr. Moniruzzaman said the capital market experienced the highest return in Asia during the Covid period but merchant banks did not adjust negative equities at the time.
He added that the securities regulator had been trying to facilitate the adjustment of negative equities for a long time.
Defending the position of merchant banks, the BMBA president said margin loans had been disbursed before the stock market debacle based on the market prices of the listed securities at that time.
"The appreciation during the Covid period was not high enough to help overcome the losses."
What's the way out?
BMBA Secretary General Muhammad Nazrul Islam said bits of negative equity might get adjusted following the market's upward trend in near future.
But the adjustment of negative equity worth Tk 4-5 billion will leave a huge impact on the balance sheets of the merchant banks.
Mr Islam, however, admitted that it would be impossible to recover the entire loss.
Explaining how severe the problem is, he said the shares that had been purchased at Tk 300 plunged to Tk 100.
"The companies having large amounts of negative equity will have to shoulder the loss today or tomorrow," Mr Islam added.
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