The Financial Express

Dubious movement of cheap money

| Updated: August 19, 2021 20:27:29

Dubious movement of cheap money

The central bank seems to have smelt a rat in the movement of bank funds. That is why it has asked the banks to submit a report on transactions daily.

Is it in any way connected with the current uptrend of the stock market?

The reactions from some stakeholders of the stock market to the Bangladesh Bank's directive to the country's scheduled banks indicate such a possibility.

Banks are now awash with idle funds and the lending rates have plunged to the lowest-ever level.

The relaxation of loan-classification conditions coupled with the availability of stimulus packages at subsidised rates has created a very favourable climate as far as the borrowing from the banks is concerned.

The central bank has recently cautioned the banks about their lending and fund operations as it detected diversion of cheap loans into unproductive sectors and other abuses. 

Possibly, the cautionary note could not stop the flow of bank funds into areas beyond the liking of the BB. That is why the latter issued the directive on August 12 last asking the banks to submit daily the reports on their transactions.

The top bankers, however, were not happy with the BB directive since they found the submission of the daily transaction reports a troublesome job. They held a meeting with the top notches of the central bank to discuss the issue, but the central bank stuck to its guns.

In the August 12 directive, the BB asked the banks to submit their daily reports in the prescribed format about their own as well subsidiaries' net exposures to the capital market within 5.0 pm each working day.

The BB has also asked the banks to furnish information on short-term loans or placements with the names of the clients to the department of offshore supervision (DOS) of the central bank within the same timeline of each working day.

The Bangladesh Merchant Bankers Association (BMBA) also, reportedly, has written to the BB to reconsider its directive on the submission of reports daily. The BMBA considers the directive relating to the submission of investment-related information by 5.0 pm daily 'impractical'.

The BB's directive, seemingly, is aimed at averting yet another 'stock bubble' as happened in 1996 and 2010. It had to share the blame for the 2010 collapse. Over-exposure of the banks to the stock market was a major reason behind creating the stock bubble and its eventual burst in 2010.

Is the current behaviour of the country's bourses in any way indicative of a bubble build-up?

It is hard to say, right at this moment. Of course, there are a few aberrations. 

Barring minor fluctuations, the market has been maintaining an uptrend since the first day of April this year. The general index has gone up 34 per cent during the past three and a half months. One might consider this uptrend rather unusual when the country is under a severe 'second wave' of the Covid-19 pandemic.

Economic activities have suffered due to the restrictions imposed intermittently to help reduce infections and fatalities. Though the infection rate declined slightly during the past few days, there is no certainty that it would remain so in the next few weeks. Most countries have been experiencing an identical situation.

Except for units in telecom, tobacco and pharmaceutical sectors, the listed issues of most other sectors have been bearing the brunt of the pandemic. The stimulus loan packages offered at subsidised interest rates have helped many companies survive in a tough time. Yet the shareholders of these companies, naturally, cannot expect fat dividends under the prevailing circumstances. So, why should the market be bullish continuously or daily turnover soar to an 11-year-high level?   


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