The Bangladesh Bank's long effort to bring banks back to the stock market has finally started to pay off with cheap money having encouraged banks to invest fresh Tk622 crore in their portfolio in the eight months since February.
Banks injected the new funds into stocks under a Tk200 crore special liquidity support scheme for each bank offered by the central bank in February this year.
Under the stock market investment scheme, the banks built up a fund of Tk2,089 crore till September. Thirty percent of the fund has been invested already. The rest are being invested gradually.
Of the invested amount, Tk542 crore went to the banks' own portfolio, Tk59 crore to their subsidiaries and Tk15 crore in loans to merchant banks, according to Bangladesh Bank data.
Earlier on 10 February, the central bank in a circular asked the banks to form a special fund of Tk200 crore each to invest in the capital market for 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.
Although there is an option to take money from the central bank for creating the fund, the banks invested from their own source because of having excess liquidity.
Moreover, the interest rate in the call money market is cheaper than that of the Bangladesh Bank money. In the call money market, banks can borrow at 2% to 3% while the interbank rate is even lower – less than 1%.
Even though banks were reluctant to invest in stocks until June, the availability of funds and a lack of credit demand in the private sector amid the pandemic encouraged banks to go for stock investment from July.
The lion's share of fresh investments came during July-September, according to banks.
Low interest rate encouraged banks to go for stock investment, said Md Arfan Ali, managing director of Bank Asia.
He said returns on investments in the money market are very low owing to high excess liquidity. As a result, banks are now preferring investing in the stock market to get high return, he added.
A huge push of reserve money in the banking system by the Bangladesh Bank to handle liquidity crunch during the pandemic coupled with a large inflow of foreign currency and a lack of demand for loans helped excess liquidity jump to a historic high of Tk1.70 trillion in August this year.
The Bangladesh Bank injected over Tk40,000 crore reserve money – considered as extra money – into the market during the pandemic through various methods.
The banking sector saw its surplus funds increase by Tk30,000 crore in a month from Tk1.40 trillion in July.
Against such a backdrop, banks which had been nervously indecisive to bring down the interest rate until 1 April, are now experiencing automatic corrections in all interest rates including lending, deposit, call money, interbank repo, and yields of government securities.
Except for the lending rate, all of the above interest rates in the money market have come down to below 2% – in some cases, below 1% – now, which were above 8-9% a year ago.
The lending rate is now below 9%, down from over 10% before April. Some banks are even offering loans at below 6% interest rates to large borrowers, according to Bangladesh Bank data.
Amid this comfort liquidity position, banks started to build up funds under the new stock investment scheme. Moreover, some benefits are offered under the scheme.
Why banks were reluctant to invest in stocks
Continuous losses from the bearish market kept banks away from stock investment since 2016.
For instance, the loss from portfolio investment of listed banks increased by 127% to Tk887 crore last year from Tk390 crore in the previous year.
Until December last year, banks invested Tk9,637 crore in their portfolio which contained equity and government securities investment, according to banks.
The huge losses from stocks eroded the banks' profits by increasing provision requirements.
Banks are required to keep a portion of income aside against losses incurred from stock investments.
However, the new investment scheme gave banks exemption from provisioning for five years if they incur a loss from stock investment. As a result, banks are now investing under the new scheme, said market insiders.
The initiative has opened up an opportunity to bring a fresh investment of Tk12,000 crore from all 59 banks in the country. The investment opportunity will remain open until 13 January 2025.
This move comes after the prime minister's instruction to take long- and short-term measures to boost the stock market.
Bangladesh Bank data revealed that banks' investment in the stock market came down to 10% in June this year, far lower than the regulatory limit of 25%.
They can lend this money to their subsidiaries, such as merchant banks and brokerage houses, at 7% interest rate.
The tenure of these kinds of loans will end on 9 February 2025. Such loans will not be considered with the banks' advance deposit ratio.
The central bank also imposed some conditions about the kind of shares banks can invest the money on.
They are not allowed to purchase shares of their own company with this money. They can purchase shares not more than 2% of other banks and financial institutions and 10% of other companies.
Furthermore, banks cannot purchase more than 10% units of a closed-end mutual fund and 15% of an open-end mutual fund.
Banks fuel stock performance
The inflow of bank money stimulated stock indices and prices of bank shares as well. The total market capitalisation of Dhaka Stock Exchange (DSE) increased by 45.54% in five months since July when the market cap of bank shares rose by 20.31%.
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, making Bangladesh market the best globally with the highest gains in indices in August.
The AFC Asia Frontier Fund found that most of its larger markets made good gains in August and Bangladesh market was the best performer globally with a gain of 15.8%.
Asia Frontier Capital Ltd, an investment company based in Hong Kong, manages various funds, namely AFC Asia Frontier Fund, AFC Iraq Fund, AFC Uzbekistan Fund and AFC Vietnam Fund.
A research conducted by AFC Asia Frontier Fund released on 8 August showed that lower interest rate, increasing exports and remittances and the reopening of the economy have led to this rally in the DSE.