International Monetary fund (IMF) has urged Bangladesh Bank to ask local commercial banks to lower their capital market exposure to 25% of regulated capital by this month.
Bangladesh Bank will have to lower commercial banks’ holding in the stock market to 25% of total regulatory capital from the prevailing 10% of total deposits within June, said a senior official of finance ministry.
The existing exposure limit of a bank was previously 10% of its total liabilities (deposits).
In October last year, Finance Minister AMA Muhith instructed the authorities to revise it to 40% of the total paid up capital of a bank with an arrangement that it would again come down to 25% in next three years.
The exposure limit was one of the 14 conditions the Fund set for Bangladesh to implement by December this year.
Bangladesh will have to comply with the conditions at different schedules until the year-end to get the fourth tranche of around one billion dollar Extended Credit Facility (ECF).
Bangladesh Bank had imposed a regulatory restriction on the commercial banks that they will not be able to invest in the capital market more than 10% of their deposits.
But the stakeholders in the stock market have long been urging the central bank to enhance the exposure limit to help the market recover from the debacle since December 2010.
An ECF mission completed its visit to Bangladesh three months ago and put forward the action plan for the government to become eligible for its fourth tranche of the disbursements.
“We have agreed to implement the reform plan, which is necessary for the financial sector,” said a senior official of finance division.
“The deadline for implementation of the reforms has been extended from February," he said.
As per the conditions, the central bank will also assist Bangladesh Petroleum Corporation to reduce its dependency on expensive short-term external credit and move towards foreign credit.
Issuance of automated taxpayer identification number with having links to the national identification number will also have to be implemented by this month. IMF considered that it would help increase the revenue earnings.
Also, the government will have to approve the demutualisation plan and model for Dhaka and Chittagong bourses within June 2013. The government, however, already enacted a law to facilitate demutualisation of exchanges.
The finance division will have to issue guidelines and procedures on budget monitoring and reporting in accordance with the Public Money and Budget Management Act within the month.
Under the conditions, the central bank has to conduct special diagnostic examinations at the four largest state-owned commercial banks focusing on asset quality, liquidity management and internal audit and controls within this.
Then it will have to revise the memoranda of understanding with the four banks to address key shortcomings within September.
A full external audit of Bangladesh Bank for the FY2012-13 should be completed by a global audit firm within December.
National Board of Revenue will have to select a vendor for the tax automation system of VAT by December.
The finance division will have to issue notification for revised terms of reference for the cabinet’s Hard Term Loan Committee within this month to strengthen external public debt management.
The conditions also require Bangladesh Bank to finalise a bank resolution framework, comprising a contingency plan and lender of last resort policy at central bank within September and complete a review of the Foreign Exchange Regulation Act.