Bangladesh Securities and Exchange Commission (BSEC) has extended the period of keeping provisions against unrealized losses (negative equity) of merchant banks and stock brokers in the stock market against unrealized losses (negative equity) of customer (investor) margin loan accounts.
In view of the demands made by the Bangladesh Merchant Bankers Association (BMBA), the provisioning period has been fixed till January 31, 2025. BSEC has issued an instruction in this regard on Thursday (March 28).
It said that stock brokers and merchant banks who could not preserve the provision against unreimbursed losses due to portfolio revaluation of the clients, the stock brokers and merchant banks have been extended till March 31, 2025 to preserve it.
Merchant banks were first allowed to keep provisions against uncollectible losses in 2013. At that time, the notification from BSEC said that merchant banks will now be able to keep provisions at the rate of 20 percent instead of 100 percent as per rules in case of revaluation losses. But it should be kept in 5 equal quarterly parts from 31 December 2012 to 31 December 2013.
This opportunity was later extended to a few more steps. First this opportunity was extended for one year till 31 December 2014. After that the period was extended till 31 December 2015 as the market situation did not improve.
But in 2015, due to further recession in the market, BSEC extended the period of reservation of provisions till 31 December 2016 in view of the application of merchant bankers.
Then in 2017, the market situation improved somewhat. However, merchant banks claim that more time is needed to heal the wounds that have been created. For this, it is demanded to extend the period of reservation of provisions till 31 December 2017.
In this way, when the time for saving the provision comes to the end, the merchant bank demands to extend the time. And the regulatory body agreed to their demands and extended the time. This time was no exception.
Recently, a letter was sent to BSEC by the association of merchant banks, BMBA, demanding to extend the time of saving provisions. In that letter, considering the current capital market condition, the demand for extension of the provision period till December 31, 2025 to stop the pressure of selling shares or forced sale of the customer has been demanded.
The letter signed by the President of BMBA and the Chief Executive Officer (CEO) and General Manager of ICB Capital Management Limited, Majeda Khatun, states that if this decision is implemented, the pressure of selling a large amount of shares from the negative equity accounts of the customers will be kept under control in the current capital market situation.
After the stock market crash of 2010, many investors who traded stocks with margin loans lost their capital. In this, the reverse investors become debtors to merchant banks.
As investors, merchant banks have two avenues to get back the money they have withheld. One of them is to sell all the shares from the investor’s account. The other is to gradually reduce the debt by making provisions against losses as investors.
If the shares are sold, the selling pressure will increase in the capital market and the capital of the merchant banks will become negative. Therefore, in order to solve this problem, BMBA proposed to extend the period to keep provision against unreimbursed losses in margin accounts of customers.
According to the BMBA letter, as per the last quarterly report till October 22, 2023, 26 members of the BMBA have negative equity issues. One of these members has already adjusted his negative equity balance. Three more members are in the process of adjusting the negative equity balance. They have promised to settle the negative equity balance adjustment by December 2024.
The letter also said that the capital market has not progressed well yet. Capital market intermediaries (merchant banks and stock brokers) who provide margin loans to investors to buy shares have not fared well since 2023. Also, investors could not recover the negative equity account losses as the capital market was in a negative state for a long time.
And in the current market situation, there is constant pressure of big selling from the negative equity account. Therefore, if this decision is implemented, the pressure of selling a large amount of shares from the negative equity account of the customers can be kept under control in the current capital market situation.
MAS/MAH/JIM
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