Banks' lending to the stock market increased substantially in the April-June quarter of this year amid rising private sector credit growth.
Growing demand from individual investors for margin loans to invest in stocks has prompted banks to lend to their subsidiary investment banks, say industry insiders.
The total loan to shares and securities rose by 17.37% or Tk1,200 crore to Tk8,140 crore quarter-on-quarter in just three months – the highest amount of lending to the stock market by banks in a single quarter in recent years, according to Bangladesh Bank data.
Banks lend their subsidiary investment banks, which is calculated as capital market exposure. And the investment banks give it to retail investors as margin loans.
The rise in demand for margin loans signals that fund flows from investors have increased as they get a certain limit of credit facility against their own equity.
Selim RF Hussain, managing director of Brac Bank, said lending to investment banks increased as capital market performance has improved.
Banks' investment in the stock market, which declined in 2021 due to a downtrend in price indices, is going up this year, he told The Business Standard.
Brac Bank is not much involved in stock market investment, but some other banks may have increased their investment, he added.
Sayedur Rahman, president of the Bangladesh Merchant Bankers Association, said the rise in fund flow into the stock market has also geared up daily turnover value at the Dhaka Stock Exchange (DSE).
He assumed that the fund flow will continue to go up in the coming days as many banks are increasing their capital market exposure after the Bangladesh Bank recently allowed them to calculate their exposure at the cost price instead of the market price.
On 4 August this year, the central bank issued a circular to this end, creating more space for lenders to invest in stocks.
Banks' lending to the stock market registered a negative growth in mid-2021 when private sector credit growth also remained depressed at a single digit.
In the April-June quarter last year, bank loans to shares and securities amounted to Tk6,660 crore, which started to decline from the July-September quarter and by December it declined by Tk200 crore to Tk6,459 crore.
Most banks incurred losses from their share market investments amid declining lending.
Lending to the stock market started to pick up at the beginning of this year when the private sector credit growth touched double digits after two years.
Credit flow to the private sector, which remained far below the monetary target in the last two fiscal years, jumped to nearly 14% in July and was very close to the monetary target of 14.1% set for the current fiscal year, according to Bangladesh Bank data.
The average credit growth in the last fiscal year stood at 10.67%, far below the monetary target of 14.8%, central bank data show.
The credit growth appears to be set to cross the monetary target soon even though the Bangladesh Bank is trying to slow down money flow to tame inflation.
The upward trend in credit growth increased money flows into the stock market, say market insiders.
The daily average turnover at the DSE crossed Tk1,500 crore this year, which was below Tk1,000 crore last year.