The Bangladesh Bank has penalised the new generation NRB Commercial Bank for overinvestment in stocks, violating the Bank Company Act.
The newly-listed bank invested more than 27% of its capital in stocks as of July when the banking law allows a maximum 25% investment on a solo basis.
Solo exposure means the bank's individual investment in the stock market.
The NRB Commercial bank was fined Tk23.5 lakh for violating the law, according to a source at the central bank.
The strict move came after the Bangladesh Bank recently launched an inquiry into the stock investment of banks.
When contacted, Parvez Tamal, chairman of NRB Commercial Bank, said the investment crossed the limit owing to an increase in share prices amid rising price indices at the Dhaka Stock Exchange (DSE).
The bank's real investment remains within 20%, he added.
Parvez said a bank's investment in stocks is calculated as per market prices. As a result, when the share market performs well, share prices go up, causing probability to cross the limit.
If a bank has to sell shares at rising prices to adjust investment limits, it will create instability in the stock market, he added.
As the price indices at the DSE remained upward, investment of many banks crossed the authorised limit, he added.
The Bangladesh Bank has fined the bank based on daily price movement. NRB Commercial Bank crossed the investment limit only for two days because of the rise in share prices.
NRB Commercial Bank, which started operation in 2013, got listed on the DSE in March this year.
The last trading price of the bank's each share at the DSE was Tk28.
The Bangladesh Bank introduced a special liquidity support scheme in February last year to drive more investments from banks to stocks.
Under this special liquidity support scheme, banks started to invest in stocks from the middle of the last year as money became cheap amid relaxing monetary tools and pumping up fresh money during the pandemic.
Now, the central bank has changed its strategy after smelling overinvestment by banks.
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.
Moreover, the central bank launched an investigation to see whether banks made investments by violating the policy of the liquidity support scheme.
In the primary observation, the central bank found that banks invested in newly-listed shares and the companies that did not give dividends more than 10% in consecutive three years, which goes against the policy of the scheme.
Why banks going for stock investment
When money was cheap and income from lending limited during the pandemic, lenders chose the stock market to invest in.
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 2020.
The consolidated stock exposure refers to all activities of a company and its subsidiaries.
The stock exposure increased to 30% in July as price indices remained upward.
Although investment in stocks jumped, it is far below the maximum permissible limit of 50% of the banks' capital.
The money from the banking system contributed to the swelling of share prices at the 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.
DSEX, the benchmark index of the DSE, crossed the 7,000 points milestone on Sunday for the first time in its history.
During the first 20 minutes of the session opening on Sunday, DSEX jumped by 0.88% to reach 7.042 points.
Capital market investment gave banks good returns when their income from core banking dropped owing 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.