The Bangladesh Bank has fined the Southeast Bank again for violating its order by continuing its overexposure to National Life Insurance Company shares.
In late December 2021, the Bangladesh Bank imposed Tk21.5 lakh fine on the private commercial bank as it failed to bring down its stake in the National Life Insurance Company within the fixed limit by the end of a stipulated time period.
Declining the Southeast Bank's appeal for six additional months to offload National Life Insurance shares, the central bank also ordered it to pay Tk50,000 in daily fines until compliance is ensured.
In October last year, the central bank imposed a Tk10 lakh fine on the Southeast Bank for the first time for its overexposure to the publicly listed National Life Insurance Company's shares and ordered it to bring down the exposure within limit by 19 December, 2021.
As per rules, a bank can hold onto a single company's shares valued up to 10% of the bank's paid-up capital and up to 5% of its total capital. During a probe in August last year, the central bank found that the Southeast Bank's exposure to National Life Insurance shares was almost double the maximum limit.
Responding to the show-cause letters from the central bank, the Southeast Bank tried to explain its investment in National Insurance Company in many ways, but failed to convince the banking regulator.
Besides, the commercial bank informed the central bank that it sold 23.4 lakh National Life Insurance shares in phases to comply with the central bank's order, and sought additional time to reduce its remaining excess stake in the life insurer.
However, the central bank found that the Southeast Bank sold the 23.4 lakh National Life Insurance shares to one of its internal accounts, instead of offloading it in the open market.
As the Southeast Bank's real exposure remained unchanged, the Bangladesh Bank did not like the trickery and imposed a Tk10 lakh fine on the bank and ordered it to offload the additional shares including the ones that were transferred to its special fund account by 19 December, 2021.
The latest penalty came as the Southeast Bank failed to follow the central bank's order.
Lacks enough buyers in the bourses
Southeast Bank Managing Director M Kamal Hossain told The Business Standard, "We are suffering from a lack of liquidity in National Life Insurance shares in the stock exchanges."
"We did not find enough buyers in the stock exchanges for so many shares to be sold in a short period."
The bank was instructed to sell more than 22 lakh shares of the company in 30 working days, where less than 10,000 shares were being traded on an average in a day in the Dhaka Stock Exchange over the period, according to Kamal Hossain.
"We could only manage to sell 1.02 lakh shares in the market and the remaining shares could be smoothly sold off if we got the six months we pleaded for," he said.
Besides, the securities regulator does not allow abnormal selling pressure in the bourses during the bearish periods like it was in the November-December of 2021, added the bank's top executive.
Additional Tk22.5 crore provisioning from 2021 profits
The central bank has also ordered the Southeast Bank to set aside Tk22.5 crore from its 2021 profits against its investment of the same amount in EM Power, a private company, as the pre-IPO placement investment did not bring a penny since October 2018.
The central bank also did not like the lack of seriousness about the investment reflected in the fact that it has no audited financial statement of the company where it had put a large sum of depositors' money.
"We made the pre-IPO investment for a good return after the company's listing in the stock market. I will sit with the company's entrepreneurs soon for an update," said Kamal Hossain.
Since August 2021, the Bangladesh Bank strengthened its monitoring on the commercial banks' activities in the capital market and several banks have been fined or warned for violating their rules.
As banks need to sell off shares as soon as price increases in the stock exchange for the sake of their exposure control, the stock market tends to get affected.
Many experts, including the capital market stakeholders, opine for an exposure calculation method that would be based on cost price of stocks instead of the current rule of considering secondary market price of shares.