Relaxed rules not enough to draw banks' special funds into pooled instruments

The recent proposal to relax conditions, attached to the special fund, for boosting investments in pooled instruments has elicited an opposing view that banks will refrain from investing unless fund managers are made accountable.

A majority of the mutual funds (MFs), irrespective of their nature, close-ended or open-ended, failed to pay any dividend to unitholders for FY24.

As per one of the conditions to be met for the utilisation of the special fund, MFs must have disbursed at least 5 per cent cash dividends annually in the previous three years to be eligible for fund injections.

Most MFs have huge unrealised losses, which is why banks are skeptical about fresh investments in MFs, said Managing Director of Pubali Bank Mohammad Ali.

"The banks are to think about returns before injecting public money in any assets," Mr Ali said.

In a similar tone of disapproval, the head of Dhaka Bank, Sheikh Mohammad Maroof said transparency in the management of mutual funds must be ensured to attract investments in them.

"Only the relaxation of the investment criteria will not attract the banks," he added.

Under the special fund, each bank is allowed to invest a maximum of Tk 2 billion in the equity market outside its stipulated market exposure limit of 25 per cent of its paid-up capital.

The special fund was introduced in 2020 by the Bangladesh Bank to support the ailing stock market.

Despite no obligations to keep provisions against banks' investments under the scheme, the formation of such funds by a majority of the banks still remains incomplete amid liquidity crisis and persistent erosion of assets' value in the secondary market.

At a meeting at the finance ministry on Monday, bank managers and representatives of regulatory bodies discussed how banks' investment from the special fund could support the mutual fund sector and the equity market. There the proposal came of relaxing the investment conditions.

Another condition attached to the special fund is that net asset value (NAV) of open-ended funds must be above the face value alongside the fact that they have paid at least 5 per cent annual cash dividends in the last three years.

Therefore, the pooled funds, which have been showing poor performance for years, do not qualify for investments from the special fund.

Managing Director of VIPB Asset Management Shahidul Islam said MFs managed by some good asset managers were performing better than the equity market.

He said VIPB Asset Management had not paid dividends to MFs' unitholders for FY24 but NAV of their portfolios increased by 5-6 per cent whereas the overall market's return was 15 per cent in the negative for the year.

However, there has been quite a number of scams committed by fund managers, sending a ripple of pessimism about the sector across the market.

The market watchdog's failure to recover embezzled funds worsened the sentiment.

This is the backdrop to the cry for support to the sector.

"The central bank should try by ensuring zero cost funds for the banks to support the market," Mr Islam said.

The chief adviser's special assistant Dr. Anisuzzaman Chowdhury, the chairman of the securities regulator, the secretary of the Financial Institutions Division (FID), and a deputy governor of the central bank, among others, attended the Monday's meeting.

The tenure of the special fund expired in February and then it was extended to December next year.

A further time extension was also discussed in Monday's meeting, said BSEC spokesperson Md. Abul Kalam.

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