Loan provision rules eased for stock intermediaries

The central bank yesterday relaxed the rules on the provisioning of bank loans to brokerage houses, merchant banks and stock dealers, a move that may make it easier for intermediaries to get credits.    

A loan loss provision is an income statement expense set aside as an allowance for uncollected loans and loan payments. The provision is used to cover various kinds of loan losses such as non-performing loans and customer bankruptcy.

In 2012, the Bangladesh Bank advised banks to maintain a 2 per cent general provision on the unclassified amount for loans to brokerage houses, merchant banks and stock dealers.

Now it has been decided that banks will have to maintain a general provision of 1 per cent on the unclassified amounts for such loans, said the BB in a notice yesterday.

The new rate will come into force from March 30, it said.

"Thanks to the relaxed rules, banks will be more interested to lend to stock market intermediaries to invest in the market. So, the money supply to the market may rise," said Md Sayedur Rahman, president of the Bangladesh Merchant Bankers Association.

He said most of the banks were reluctant to lend to the intermediaries since they had to set aside a 2 per cent provision.

According to Rahman, keeping the 2 per cent provision was quite tough for banks since the interest rate spread – the difference between the lending rate and the deposit rate – is 3 per cent in the banking system in Bangladesh.

"Now, the stock market intermediaries will get more loans," he added.

The central bank maintained a 9 per cent lending rate and a 6 per cent deposit rate since April 2020 before bringing in some changes last month.

In January, the deposit rate floor was scrapped while banks were allowed to raise the interest rate on consumer loans to as high as 12 per cent. The lending rate ceiling on all other loans is still 9 per cent, however.

A stock market analyst says the central bank has relaxed the provisioning rules in a bid to boost investors' confidence.

The DSEX, the benchmark index of the Dhaka Stock Exchange, has been hovering around 6,200 points for months and turnover dropped below Tk 500 crore due to the lack of confidence among the investors amid persisting economic uncertainty caused by the fallout of the Russian war in Ukraine and the global energy shortage as well as the energy crunch and higher inflation in Bangladesh.

As the stock market investment is quite risky, the central bank has advised banks to keep higher provisioning to safeguard the interest of depositors, said the analyst.

He, however, thinks that funds from banks should not come to the stock market in the first place since the market is driven by speculation.

"The stock market in Bangladesh relies heavily on banks. But for a strong and vibrant stock market, the market should get rid of this reliance," he said.