Flash Report /

Bangladesh banks given incentive to form US$23.5mn special funds

    IDLC Securities
    11 February 2020
    Published byIDLC Securities

    The central bank has allowed all scheduled banks to create a special fund worth BDT2.0 billion (USD 23.5mn) each of five-year tenure. This fund can be created through the bank’s own fund or from the repo facility from Bangladesh Bank.

    Special Fund Details: 

    • Each scheduled bank is allowed to create USD 23.5mn special funds for investing in the capital market. Fund can be sourced from their own resources or with funds received from the Bangladesh Bank (BB) through repo or re-financing mechanism. The banks will be eligible to get repo (repurchase agreement) facilities against treasury bills (T-bills) and treasury bonds (excess of SLR requirement) at a 5.0% interest rate instead of the existing 6.0%.
    • This USD 23.5mn will not be counted under capital market exposure on both solo and consolidated basis. On top of that, Bank doesn’t need to keep any provision for any unrealized loss of this investment. Both these benefits will be available for the next 5 years.
    • According to the circular, 40% of the fund has to be invested through its own portfolio, 20% has to be invested through a subsidiary, 30% can be lent to capital market subsidiaries of other scheduled banks and rest 10% can be lent to other brokerages and merchant banks. It is to be noted, all investment has to be done through newly opened brokerage account. Banks will be able to charge a maximum of 7% interest rate on lending with a maximum of 5 years of tenure.

    Investment Guideline:

    • This fund can be invested in only listed capital market instruments including fixed income securities (private and government securities) and mutual funds (both open-ended and closed-ended or special-purpose fund).
    • Banks are not allowed to invest in their own securities and can invest a maximum of 2% of other financial institutions. Besides, banks are allowed to invest up to 10% of the total issued shares for non-financial companies.
    • Banks can invest a maximum of 10% of the fund to closed-end mutual funds and a maximum of 15% of the fund to open-end mutual funds.
    • Following criteria have to meet before making investment from the special fund
      • For equity investment
        • Minimum 10% dividend (stock, cash or combination) in last 3 years consecutively
        • Sponsor holding a minimum of 30% 
      • For fixed-income investment
        • Minimum 10% coupon payment for corporate bond
        • Any government securities
      • For mutual fund
        • Minimum 5% cash dividend in last 3 years consecutively
        • For open-end Net Asset Value (NAV) has to be higher than face value and Minimum 5% cash dividend in last 3 years consecutively
        • Any mutual funds started after this circular but it must have to have 70% investment in equity instruments.

    Other Guidelines

    • This subsidiary loan or other capital market intermediary loan will not be considered in Advance Deposit Ratio (ADR).
    • For capital adequacy calculation, this loan will have a 100% risk weight.
    • Single borrower limit will be applicable for this loan and the maximum loan a bank can give to its subsidiary or other brokerages or merchant banks is limited to its paid-up capital amount.