Dhaka, Bangladesh (BBN) – Bangladesh Bank (BB) has for the first time set capital market exposure limit for the commercial banks, officials told BBN on Tuesday.
Under the new provisions, banks will be allowed to invest not more than 10 percent of their total liabilities in the capital market.
The central bank issued a circular in this connection Tuesday and asked the chief executives of all scheduled banks to follow the capital market financing limit.
Currently, a small number of commercial banks are investing heavily in the country’s capital market resulting in massive surge in share prices as no limit is applicable, they added.
Besides, the banks will not be allowed to conduct merchant banking or brokerage house business from October 1 this year without formation of subsidiary companies for the purpose.
“We’ve taken the measures to strengthen monitoring and supervision of capital market-related activities of the commercial banks,” a BB senior official said.
The central bank will deal with only the banks, not subsidiary companies as per the new provisions, he said, adding that the Securities and Exchange Commission (SEC) will look into the functions of the subsidiary companies.
“No bank will be able to operate their merchant banking business without forming a separate subsidiary company,” the BB official said, adding the banks will have to ensure holding of shares in line with the existing bank companies act.
Under the existing act, no bank company shall be empowered to hold shares of other companies whether as pledge or mortgage or as exclusive owner of an amount exceeding (a) thirty per cent of the total amount of the paid-up capital and reserve of the said company and (b) thirty per cent of the paid-up capital of the said company.
Provided further that the amount of the shares fixed by any bank company shall, in total, not exceed 10 (ten) per cent of its whole obligations, the act said.
The BB has also asked the banks to maintain the existing single-borrower exposure limit for providing loan facilities to their subsidiary companies or others.
The banks must have to comply with the capital market exposure limit and submit reports on their monthly-based share-holding position in a prescribed form to the Department of Off-site Supervision of BB within 10th of each month.
The central bank earlier re-fixed the limit on large loans of single borrower exposure by 15 per cent of respective bank’s equity to improve risk management in the banking sector.
The single borrower exposure limit on large loans has already been reduced from 50 per cent to 35 per cent that includes 15 per cent funding facilities.
“Non-funded credit facilities like letter of credit (LC) can be provided to a single large borrower. But in no circumstances, the total amount of the funded and non-funded credit facilities shall exceed 35 per cent of a bank’s total capital,” the BB said earlier in a circular.
Under the existing provision, loan sanctioned to any individual or enterprise or any organization of a group amounting to 10 percent or more of a bank’s total capital will be considered as large loan.
BBN/SS/SI/AD-16June10-2:37 am (BST)
