Muhith rejects proposal to raise banks stock exposure

Finance Minister AMA Muhith has rejected Orion Group Chairman Obadul Karim’s proposal to raise the limit of stock market exposure for commercial banks along with any contract with the company on the basis of its stocks. The minister recently expressed his agreement with a Bangladesh Bank letter that argued that risks to the banking sector would increase if the limit is raised and if companies can obtain loans on their stock market holdings. However, the central bank says large business groups can obtain loans for investment in priority sectors in the country under state loan guarantee. The Orion Group appealed directly to the Prime Minister’s Office to amend the provisions of the Bank Company Act. The government is amending the law to change the structure of bank director boards. Earlier, Bangladesh Bank General Manager Abu Fara Md Nasar sent the letter to the Finance Ministry recommending that the provisions 26 (A) and 26 (B) of Bank Companies Act 1991 not be amended, in reply to the ministry’s query. In his letter, he said if the provisions are amended, there will be a negative impact on the country’s stock market. Officials of the Bank and Financial Institutions Division said the central bank does not agree with the proposed amendment to provision 26 (A) as the big groups want to have contracts with banks who invest in stocks. They said the central bank thinks the investments are not certain and are risk-prone. The Bangladesh Bank letter reads: “Overall bank investment in the stock market needs to be limited for the betterment of the local stock market.” It says the government should provide guarantees to large business group loans on a case-by-case basis. “Syndicated loans to large business groups will ease the risk of implementation of any big project,” he said. Under the provision 26 (A), banks are not allowed to invest more than 5% of their paid up capital in the stock market. The banks’ share market exposure limit is 25% of its capital under the provision 25 (B) of the Bank Companies Act 1991. The capital includes paid-up capital, share premium, statutory reserve and retained earnings. But the Bangladesh Bank gives exemption of bank exposure if the government provides loan or guarantee to the bank for investing in the stock market, according to the law. Earlier in December 2015, the banks’ capital given to their stock market subsidiaries were kept out of their stock market exposure.