When money was cheap and income from lending limited during the pandemic, lenders chose stock market to invest and capital market exposure of banks increased by Tk4,100 crore in the last year from the previous year.
The consolidated stock exposure of banks went up to 24% amid the pandemic in 2020 from 22.8% in the previous year, according to the financial stability report of the Bangladesh Bank for the year 2020. The consolidated stock exposure refers to all activities of a company and its subsidiaries.
Though investment in stocks jumped, it is far below from the maximum permissible limit of 50% of the banks' capital.
The money from the banking system contributed to the swelling of share prices in the Dhaka Stock Exchange (DSE), making it the best performing bourse among Asian frontier markets in August last year and May this year.
A research report released last year by Asia Frontier Capital Ltd, an investment company based in Hong Kong, showed that lower interest rate, increasing exports and inbound remittances had contributed to the rally.
Capital market investment gave banks good returns when their income from core banking dropped due to the lending rate cap at 9%. Therefore, the loss counted in interest income has mostly been mitigated by income from investments in stocks and government securities.
Islami Bank, the largest investor in the stock market among banks made a profit of Tk200 crore last year, EXIM Bank Tk203 crore, Social Islami Bank Tk78 crore, Shahjalal Islami Bank Tk72 crore, Al-Arafah Islami Bank Tk68 crore and First Security Islami Bank Tk53 crore, according to their annual reports.
Low-interest rate has turned to be a blessing for the stock market as both individual and institutional investors are choosing to park their money in stocks.
Lending rates in the banking sector came down to 6-7% after the government imposed the ceiling in April last year. Deposit rates also fell to 1-2% encouraging individuals to divert their money into stocks.
Last year, the banking sector saw a 9.4% decline in interest income from the previous year. At the same time, non-interest income increased by 24.5%, according to the central bank data.
However, the Bangladesh Bank that introduced a special liquidity support scheme to drive more investments from banks to stocks has moved to rein in the money flow.
As part of its latest strategy, the central bank has strengthened its monitoring of banks' investments in stocks, asking them to report capital market exposure and short term loans on a daily basis.
The Bangladesh Bank sent a letter to all banks last week addressing the matter.
It has also started to drain away excess liquidity from the money market by issuing bills.
In the first two auctions since 9 August, the central bank mopped up Tk8,000 crore from banks, which has already made an impact on the stock market, slowing down the price indices and the daily transaction volume.
In February last year, the central bank offered the liquidity support scheme, under which banks were asked to form a special fund of Tk200 crore each to invest in the capital market over the next five years.
Banks can build up the fund from their own source or take the money from the central bank through a repurchase agreement (repo) at 4.75% rate.
The effort was to bring banks back to the stock market.
Though banks were reluctant to invest in stocks until June last year, the availability of funds and a lack of credit demand in the private sector amid the pandemic prompted banks to go for stock investments from the next month.
The Bangladesh Bank in its financial stability report said the capital market in Bangladesh was bullish last year.
Despite the effect of Covid-19, expansionary monetary policy, government's stimulus packages, prudent management of the pandemic, and strategies of Bangladesh Securities and Exchange Commission have helped the market remain buoyant, reads the report.
The DSE increased by 21.3% in 2020 and the market capitalisation rose 32%.
The daily average turnover leaped to Tk650 crore last year from Tk 450 crore in 2019.
Md Arfan Ali, managing director of Bank Asia, said returns on investments in the money market were very low owing to high excess liquidity and so banks now preferred to invest in the stock market to get high returns.
A huge push for reserve money in the banking system by the Bangladesh Bank to handle liquidity crunch during the pandemic coupled with a huge inflow of foreign currency and a lack of demand for loans made excess liquidity jump to nearly Tk2,00,000 crore, the highest ever in the sector.