FE Report (September 21, 2010)
A senior bank executive has urged the central bank to extend the deadline of the banks' holding and exposure limit of their investment in the country's growing stock market.
"Bangladesh Bank intervention on the stock market investment by banks has been a good and timely steps to protect the banking sector but the deadline should be extended up to 2011 so that the banks should not hurriedly sell its holdings and destabilize the market," Ehsan Khasru, Deputy Managing Director & Chief Risk Officer of City Bank Ltd told the FE Tuesday in an interview.
According to the Bank Companies Act, the banks can invest no more than 10 percent of their total liabilities in the markets.
But some of the banks' investment in stock market are beyond the central bank's mandated limit.
That's why the Department of Offsite Supervision (DOS) of Bangladesh Bank in a circular (DOS 4) on June 15 last directed the banks to reduce the limit within 10 per cent by October 31, 2010.
"We welcome the BB directive, although timeframe is too short, to bring discipline in the banks in share-holding within 10 per cent cap," Mr Ehsan said.
Bankers said banks and financial institutions are earning a big portion of their profits through investing in the stockmarket. Some even take loans from the call money market to invest in share market.
The amount invested by 32 local and foreign banks in the markets is Tk 205.76 billion, or 6.86 percent of their total liabilities. The total investment by the banks and financial institutions in the stock market stood at Tk 221.14 billion as on June 30 last, according to BB statistics.
Hailing the BB move, Mr Ehsan said before DOS 4, section 26(2) of Bank Company Act 1991 issued broad guidelines on the share holding/investments by Banks.
Under DOS 4, holdings means individual banks investments in share (proprietary investment), lien shares against loans & advances and shares under custody (share lien by banks brokerage house against margin loan).
Commenting on the valuation of share-holdings, the City Bank DMD said it has to be done through market price while banks are currently doing at acquisition price and are not violating the Bank Company Act or DOS 4.
Explaining the possible bubble of the stock market prices, the senior banker said if a bank purchases a share at Tk 500 and builds up a portfolio of Tk 500 million, the market price of the item thus shoots up to Tk 2.50 billion.
This escalation thus exceeds 10 per cent holding requirements.
Explaining the present reality, the City Bank DMD said banks cannot increase its liability size to a large extent to become 10 per cent cap compliant within short time.
"It will not be a good idea to sell its shares, especially large volume which will destabilize the stock market and currently the market is perceived as artificially bubbled."
" To value the shareholding at the current price won't give the reflection to its worth," he said.
He said market control is a good technique in developed capital market and we can customize it by taking average 6 months price to come to valuation (6 months price also include current price).
A senior bank executive has urged the central bank to extend the deadline of the banks' holding and exposure limit of their investment in the country's growing stock market.
"Bangladesh Bank intervention on the stock market investment by banks has been a good and timely steps to protect the banking sector but the deadline should be extended up to 2011 so that the banks should not hurriedly sell its holdings and destabilize the market," Ehsan Khasru, Deputy Managing Director & Chief Risk Officer of City Bank Ltd told the FE Tuesday in an interview.
According to the Bank Companies Act, the banks can invest no more than 10 percent of their total liabilities in the markets.
But some of the banks' investment in stock market are beyond the central bank's mandated limit.
That's why the Department of Offsite Supervision (DOS) of Bangladesh Bank in a circular (DOS 4) on June 15 last directed the banks to reduce the limit within 10 per cent by October 31, 2010.
"We welcome the BB directive, although timeframe is too short, to bring discipline in the banks in share-holding within 10 per cent cap," Mr Ehsan said.
Bankers said banks and financial institutions are earning a big portion of their profits through investing in the stockmarket. Some even take loans from the call money market to invest in share market.
The amount invested by 32 local and foreign banks in the markets is Tk 205.76 billion, or 6.86 percent of their total liabilities. The total investment by the banks and financial institutions in the stock market stood at Tk 221.14 billion as on June 30 last, according to BB statistics.
Hailing the BB move, Mr Ehsan said before DOS 4, section 26(2) of Bank Company Act 1991 issued broad guidelines on the share holding/investments by Banks.
Under DOS 4, holdings means individual banks investments in share (proprietary investment), lien shares against loans & advances and shares under custody (share lien by banks brokerage house against margin loan).
Commenting on the valuation of share-holdings, the City Bank DMD said it has to be done through market price while banks are currently doing at acquisition price and are not violating the Bank Company Act or DOS 4.
Explaining the possible bubble of the stock market prices, the senior banker said if a bank purchases a share at Tk 500 and builds up a portfolio of Tk 500 million, the market price of the item thus shoots up to Tk 2.50 billion.
This escalation thus exceeds 10 per cent holding requirements.
Explaining the present reality, the City Bank DMD said banks cannot increase its liability size to a large extent to become 10 per cent cap compliant within short time.
"It will not be a good idea to sell its shares, especially large volume which will destabilize the stock market and currently the market is perceived as artificially bubbled."
" To value the shareholding at the current price won't give the reflection to its worth," he said.
He said market control is a good technique in developed capital market and we can customize it by taking average 6 months price to come to valuation (6 months price also include current price).
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