Liquidity crunch limits banks’ investment in stocks

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Banks are facing a squeeze due to a liquidity crunch, making it difficult for them to invest in the stock market despite the opportunities that exist within their exposure limits.

This lack of investment from banks as institutional investors has also affected the capital market, slowing down indices and turnover.

However, there has been a glimmer of hope as trading picked up slightly since the last week with a slight uptick in participation from institutional investors. On Tuesday, the Dhaka Stock Exchange saw its highest trading in the last two months.

Banks are allowed to invest 25% of their capital in the stock market, but many are missing out on the chance to increase their investment in the market.

Bankers have stated that many banks are in a bind due to buying dollars at high prices and the market’s volatility due to the country’s economic situation. As a result, banks are now hesitant to invest in the capital market.

They have also said while banks have made profits by selling dollars at high prices, their returns from the stock market have decreased recently due mostly to the market volatility.

In the wake of the recent fund crisis, the Bangladesh Securities and Exchange Commission has launched an assessment to verify investments by banks in the market.

The commission has found that within the exposure limit, banks have the capacity to invest about Tk17,000 crore in the capital market, but as of last December, they have invested only about Tk12,000 crore.

This means that banks have the ability to invest another Tk5,000 crore within the exposure limit.

In 2020, the Bangladesh Bank allowed banks to form a Tk200 crore special fund each by taking low-cost loans from the central bank to invest in the stock market.

The commission found many banks are yet to invest in the market despite forming the fund, while a number of them are yet to form the fund.

According to commission sources, the BSEC has obtained stock investment information of 31 banks out of the listed 34.

According to the commission, although there is an opportunity to invest 25% of the capital in the market, on a consolidated and solo basis, the banks have an average stock investment of less than 20%, with some banks investing as little as 15%. 

AB Bank has invested around Tk400 crore in the capital market, which is 19.72% of its total capital. Bank Asia has invested Tk500 crore, which is around 19 of its total capital. 

City Bank has invested 15.82%, BRAC Bank 15.14%, and Dutch-Bangla Bank 15% stock investments against their capital. The stock investment portfolio by the remaining banks turned out to be quite the same. 

BSEC Chairman Professor Shibli Rubayet-Ul Islam said banks, insurances, and non-bank financial institutions are key institutional investors in the capital market.

“Their cash crunch is badly hurting the market and mounting pressure on the indices,” he told The Business Standard, and urged banks to increase their stock investment as much as possible. 

Selim RF Hussain, managing director of Brac Bank, said stock investment is up to the investment strategy of banks. 

Apart from the cash crunch, he commented that many banks might be waiting to buy shares at a lower price thanks to the market volatility. 

But in conditions of anonymity, a private bank managing director told The Business Standard that they are not in a position right now to afford risky investments like the capital market.  

“All the banks know why the market is falling. So, they will not turn to stock investment amid the turmoil. They will boost stock investment once the market is stable,” he told The Business Standard. 

Rezaul Karim, executive director and spokesperson of the BSEC, said there was a downtrend in the capital market in the last quarter, putting many of the institutional investors in a cautionary position.  

But with the new monetary policy for the January-June announced recently, he sounded optimistic about liquidity flow in the banking sector. He believes this will eventually boost investments by banks in the market.