Most of the merchant banks dealing mostly with share lending are in deep trouble, as considerable amount of fund remained stuck-up since the 2010 stock market crash.
Market sources said the merchant banks that are subsidiary of the scheduled banks are in worst situation due to whimsical lending on fundamentally weak stocks.
A few of the merchant banks are trying to get out of the sorry state while some falls in problem afresh recently as the market situation is going through high volatility at present.
“We are facing severe problem due to rising default loan since the market crash,” Tanjil Chowdhury, president of Bangladesh Merchant Bankers Association (BMBA) told the Dhaka Tribune yesterday.
However, he declined to disclose the figure of default loan saying “it is upsetting figure, I do not want to disclose” in interest of the business and the market as well.
“Equity of most clients went negative due to weak market situation, leading to pile up margin loans that remained as unrealised losses for long,” he said.
To overcome the situation, the BMBA on Thursday last wrote to Bangladesh Securities and Exchange Commission (BSEC) to take immediate steps to help strengthen the financial footing and improve governance of the merchant bankers.
The margin lending business has severely been affected after the 2010 market crash, said the letter.
“The margin lenders have little or no tool to recover the loans, unlike the commercial banking practices. The capital adequacy of many merchant bankers has been severely affected. There is no visible recovery map on the sight either.”
The BMBA president said some immediate measures, including tax incentive, low-cost fund facility and provisioning relaxation need to bail out the merchant bankers of the worst situation.
“Given the current scenario, we need a systematic approach to recapitalise the institutes by injecting fresh equity and do the right provisioning in a phased out manner,” he said.
According to BMBA proposal to the regulator, under the prevailing circumstances of the capital market, the Commission might grant any applicant, on case to case basis, time extension of existing facility of provisioning, at a rate of 20% in five equal quarterly till 20015, considering the business severity of that respective companies.
Presently, merchant bankers should comply with the provisioning requirement guidelines of BSEC for own portfolios by every year end.
The merchant bankers should not allow any more account to enter into negative equity zone and increase the provisioning burden further and any account falling below 20% of its equity will be subject to daily basis adjustment, the proposal said.
It said the merchant bankers should follow some prudential guidelines, which is a proposed optional requirement and the BSEC should consider allowing the merchant bankers for another three years time to complete the capital injection and require provisioning phase by phase, who agree to adhere to the proposed prudential guideline.
To facilitate the recovery of huge default margin loan, the association proposed that clients having loan with more than Tk1 crore come under CB reporting to Bangladesh Bank, as the merchant bankers do not have any other functional resources, it said.
It also sought clarification of provisioning circular and said auditors and businesses are explaining it differently.
Some are considering unrealised losses, some counting both unrealised and realised losses, some considering deterioration at total portfolio level and some counting negative equity at individual client level in provisioning, the letter said.
The association also proposed to bring reform in prudential guidelines on equity management in the light of the present market situation.
It also proposed the merchant bankers will not accrue any income from negative equity accounts and part it as interest suspense.
“The objective is to follow the conservative principle of accounting. Also when the principal amount of loan is not being recovered, booking income from that bad asset does not sound prudent. Also booking fictitious income and paying taxes cut of it is detrimental to shareholders interest,” it said.
The proposal said for the accounts which are severely affected will be liquidated and closed gradually, if client does not commit to settle his or her liabilities. Appropriate notices should be sent to the clients first. However, a merchant banker will decide on its own, if it wants to set a stricter threshold, it said.
