FE Report (October 27, 2010)
In an apparent bid to put a leash on a volatile stock market and minimize banks' risks, the central bank Wednesday increased the rate of general provisioning requirement for unclassified loans extended against shares.
In a circular, the Bangladesh Bank asked the banks to maintain a 2.0 per cent general provision, instead of the previous rate of 1.0 per cent, for unclassified loans to brokerage houses, merchant banks, stock dealers and individuals against shares. Merchant banks would also include the separate subsidiaries formed by the banks for stock trading.
"We've taken the measure with the objective of mitigating the risks by strengthening the capital base of the banks," a senior official of the Bangladesh Bank (BB) told the FE Wednesday.
He also said such general provision will be treated as supplementary capital, generally known as Tier-2.
For the purpose of supervision, bank's capital is categorised into two tiers: Tier-1 is treated as a core capital comprising the highest quality capital elements like paid up capital and reserve.
And the Tier-2 is supplementary capital that represents other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank.
Bankers, however, said the measure would have a negative impact on the profitability of banks, thus, reducing their capacity to offer dividends to the shareholders.
"Banks announce their dividends after maintaining provisions in line with the BB's rules and regulations. It will certainly curtail the banks' capacity of offering dividends to the shareholders," a chief executive of a leading private commercial bank told the FE, preferring anonymity.
The central bank in the circular instructed the chief executives of all scheduled banks to maintain the general provision on unclassified loans against shares properly.
"We want to strengthen the capital base of the commercial banks and minimising risks," another BB official said while explaining the main objective of the new provisions.
The central bank's latest instruction came against the backdrop of over- exposure of 10 private commercial banks to securities market until September last.
"We expect that the banks would able to bring down their holdings and exposure within the prescribed limit by the end of next month," the BB official said, adding that it would be possible to comply with the rules and regulations without disturbing the share market.
Under the new provisions, banks will be allowed to invest not more than 10 per cent of their total liabilities in the capital market.
Besides, the banks will have to ensure holding of shares in line with the existing Bank Companies Act, the BB officials said.
Under the existing act, no bank company shall be empowered to hold shares of other companies whether as pledge or mortgage or as exclusive owner of an amount exceeding (a) thirty per cent of the total amount of the paid-up capital and reserve of the said company and (b) thirty per cent of the paid-up capital of the said company.
In a circular, the Bangladesh Bank asked the banks to maintain a 2.0 per cent general provision, instead of the previous rate of 1.0 per cent, for unclassified loans to brokerage houses, merchant banks, stock dealers and individuals against shares. Merchant banks would also include the separate subsidiaries formed by the banks for stock trading.
"We've taken the measure with the objective of mitigating the risks by strengthening the capital base of the banks," a senior official of the Bangladesh Bank (BB) told the FE Wednesday.
He also said such general provision will be treated as supplementary capital, generally known as Tier-2.
For the purpose of supervision, bank's capital is categorised into two tiers: Tier-1 is treated as a core capital comprising the highest quality capital elements like paid up capital and reserve.
And the Tier-2 is supplementary capital that represents other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank.
Bankers, however, said the measure would have a negative impact on the profitability of banks, thus, reducing their capacity to offer dividends to the shareholders.
"Banks announce their dividends after maintaining provisions in line with the BB's rules and regulations. It will certainly curtail the banks' capacity of offering dividends to the shareholders," a chief executive of a leading private commercial bank told the FE, preferring anonymity.
The central bank in the circular instructed the chief executives of all scheduled banks to maintain the general provision on unclassified loans against shares properly.
"We want to strengthen the capital base of the commercial banks and minimising risks," another BB official said while explaining the main objective of the new provisions.
The central bank's latest instruction came against the backdrop of over- exposure of 10 private commercial banks to securities market until September last.
"We expect that the banks would able to bring down their holdings and exposure within the prescribed limit by the end of next month," the BB official said, adding that it would be possible to comply with the rules and regulations without disturbing the share market.
Under the new provisions, banks will be allowed to invest not more than 10 per cent of their total liabilities in the capital market.
Besides, the banks will have to ensure holding of shares in line with the existing Bank Companies Act, the BB officials said.
Under the existing act, no bank company shall be empowered to hold shares of other companies whether as pledge or mortgage or as exclusive owner of an amount exceeding (a) thirty per cent of the total amount of the paid-up capital and reserve of the said company and (b) thirty per cent of the paid-up capital of the said company.
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