The investment bank, which began its journey in January 2021 with a capital of Tk 1 billion, disbursed Tk 100 million in margin loans two years back. Now the debt burden of the borrowers has been reduced to around Tk 1 million, a rare success in a market overwhelmed by negative equity.
The achievement has been possible because the company has cautiously chosen stocks for own investments and disbursement of margin loans to its clients, said UCBIL's Managing Director Tanzim Alamgir in a recent interview with The FE. 
UCBIL, a subsidiary of United Commercial Bank, considers market liquidity and the size of free float of a stock to decide whether to provide margin loans for investments in the stock.
"If we were aggressive towards injecting funds into equity-based securities, our present situation would not be this good. Even payments of our employees' salaries could be hampered," said Mr Tanzim, referring to the bearish and unpredictable market over the last couple of years.
The merchant bank also diversified its portfolio through investments in fixed income securities.
In Bangladesh's capital market, said Mr Tanzim, both lenders and borrowers will suffer if they are not careful in equity investments with margin loans.
His company also conducts a thorough assessment of its clients' ability to pay back before disbursing margin loans.
"The clients' backgrounds and ability to repay are assessed by our team," said Mr Tanzim.
The most important thing is that UCBIL has never given margin loans exceeding a ratio of 1:0.5. That means if a client has investments worth Tk 100 in marginable stocks, he/she would be able to take not more than Tk 50 in loan.
However, at present the securities regulator allows margin loans at a ratio of 1:1. Some investment banks even exceed the limit.
"It's [margin loans] our product. Someone does like it or not, but our strategy keeps both our company and clients safe," Tanzim said.
Keeping provision in advance
UCBIL, however, has had its ups and downs while navigating the volatile market.
It gained a remarkable 28 per cent annual profit from equity-based investments in its own portfolio in 2021, the year when the broad index of the Dhaka bourse experienced a growth of 20.25 per cent. The gloomy market the next year dragged the company in the red. Last year, UCBIL's equity-based portfolio rebounded.
However, the company has never dealt with negative equity whereas most other merchant banks are overburdened with negative equity that ballooned after the 2010-11 stock market debacle.
Despite having no negative equity,
UCBIL keeps provisions worth around
Tk 10 million at the very beginning of every year.
The reason, said Mr Tanzim, is that the company's portfolio may see erosion at any time of a year due to market behaviour. The erosion is hard to predict beforehand.
"Any erosion experienced in the middle or end of a year could change the position of our own portfolio. That's why an advance provision is kept at the beginning of every year."
UCBIL also has no receivables from any client as it prefers cash-based deals and transactions.
UCBIL's strategy to invest in securities
The company makes investments in about 10 listed securities whereas the number of listed companies is 360.
It takes into account business prospects of a company before including it in its list of investable securities. The list has to be approved by the company's board. Every new entry in the list requires prior approval from the board.
"We have no scope of injecting funds into a stock whimsically or being influenced by others or without prior approval of the board. That's why our investment portfolio remains safe," the UCBIL chief added.
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