Tk100cr low-cost loan release stalls when stock brokers need it most

Key intermediaries in the stock market, brokers and dealers, are yet to access loans from the Tk100 crore fund announced by the Capital Market Stabilisation Fund (CMSF) two months ago.

Expressing their need for additional funds to invest, intermediaries said the delay in fund disbursement is impeding efforts to enhance liquidity in the bearish capital market.

The CMSF board in a meeting on 4 January, approved the disbursement of this loan through Community Bank Bangladesh, a subsidiary of Bangladesh Police Kallyan Trust, at a fixed interest rate of 7%, with an additional service charge of around 1% (could be more or less than 1%).

Md Monowar Hossain, chief of operations at the CMSF, told TBS, "We have already provided a list of selected brokerage firms to the bank for loan disbursement. The funds are now held in a Special Notice Deposit (SND) account [an interest-bearing deposit account where advance notice is required for withdrawal]."

Regarding the delay, he said, "There is a small issue with the interest rate on the loan. Since the fixed rate is lower than the SMART rate set by the Bangladesh Bank, the Community Bank has requested permission from the central bank. We anticipate resolving this matter soon, after which the disbursement will proceed."

To avail this loan, brokerage firms must maintain deposits equivalent to the loan amount in their own accounts. The objective was to infuse Tk200 crore into the capital market, with Tk100 crore loans from the CMSF and another Tk100 crore from brokers. This fund would be invested in fundamental A-category companies.

On 31 January, the CMSF sent a letter, attaching a list of 12 chosen brokerage firms, to the Motijheel branch of Community Bank, urging prompt processing of loans for these entities. Each firm will be granted loans ranging from Tk2 crore to a maximum of Tk5 crore.

Amid the delay in disbursement, stakeholders started to question the effectiveness of the fund.

Md Ariful Islam, manager of Community Bank's Motijheel branch, told TBS, "We have encountered a small issue with the interest rate and are working on resolving it. Two clauses in the final agreement with CMSF for loan disbursement are being changed."

When questioned about the nature of these changes, he responded, "The interest rate might undergo a slight increase. With a few more adjustments, loan disbursement will commence shortly. We are reaching out to firms listed by CMSF."

Now is the time for investment: Intermediaries

On 18 January, the Bangladesh Securities and Exchange Commission (BSEC) removed the floor price restriction on stocks, which had been in place for over two and a half years. Subsequently, more than two dozen companies were downgraded to the "Z" category.

These developments have sparked panic in the capital market, leading to increased selling pressure on shares and a continuous decline in prices and transactions.

On 13 March, the benchmark index DSEX of the Dhaka Stock Exchange plunged to its lowest level in 33 months, marking a decrease of 192 points over the past five working days.

Meanwhile, stakeholders perceive a shift of funds from the capital market to banks attributed to the rise in interest rates on bank deposits. They argue that injecting low-interest funds at this time could support the capital market. Additionally, with the prices of high-quality shares currently low, there is potential for profit.

Ashequr Rahman, managing director of Midway Securities, told TBS, "The intention behind this fund was to offer assistance for investments in the bearish market. This would enable the market to be supported by purchasing shares during periods of high selling pressure."

He continued, "Now is a good time for new investments. The market is bearish now with many good stocks undervalued. However, if the market goes up, it will be very difficult to make a profit with the said fund. Many stocks may also go up in price, making it difficult to make a profit, and these funds taken as loans will create new pressure."

Who will get the CMSF loan?

The CMSF, which was formed in 2021, acts as a custodian of undistributed cash and stock dividends, non-refunded public subscription money and un-allotted rights shares from the issuer of listed securities. It has around Tk250 crore in its Special Notice Deposit account allotted for loan disbursement to intermediaries.

In May 2023, the BSEC set loan disbursement targets of at least Tk5 crore and not more than Tk20 crore for each intermediary.

However, in October, the CMSF decided to disburse loans of Tk2 crore to each applicant of the stock market intermediary on a pilot basis. After the successful implementation of the test case, the CMSF will increase lending as per demand from the intermediaries.

The tenure of the loan will be 180 days, renewable upon successful use of the loan amount and full payment of loan interest to CMSF.

As per the plan, the CMSF will give preference to intermediaries who are involved in the financial literacy programme, providing training to small investors, involved in social welfare activities, working with disabled people, protecting the environment, and following other corporate social responsibilities.

Any stock broker or intermediary, which has a deficiency in consolidated customers' account (CCA), is not compliant with risk-based capital adequacy or has had any punishment from the authorities in the last five years, will not avail the loan.

Also, an intermediary or any director of an intermediary, who is a loan defaulter according to the Credit Information Bureau (CIB) report, will not be eligible for the loan.

The market intermediaries — stock brokers and dealers — can use their borrowing from CMSF to invest in stocks that have been in the "A" category for five consecutive years.

Also, they can provide margin loans to their clients as per policy. The single-borrower exposure will be a maximum of 5% of the total available funds for the loan.