As part of a precautionary measure to avert a possible 'asset bubble', Bangladesh Bank (BB) has warned the commercial banks of diverting funds to unproductive sectors like the stock market or real estate.
The central bank alerted the scheduled banks amid huge fund flow through the BB’s refinancing facilities to the money market due to the low-cost stimulus packages announced by the government to help recover the pandemic-hit economy, officials said.
They expressed the fear that if the fund flow continues unabated into the market, it is likely to create an 'asset bubble'.
An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises at a rapid pace without underlying fundamentals, such as equally fast-rising demand, to justify the price spike.
The BB sent a letter to all the managing directors (MDs) and chief executive officers (CEOs) of the scheduled banks on Sunday, conveying the risks of diverting fund to the unproductive sectors.
The Financial Express (FE) has obtained a copy of the letter.
The commercial banks have also been asked to ensure the end use of the funds through conducting necessary inspections by their internal audit departments.
The BB also found that a portion of the funds under the stimulus packages is being diverted and used in the unproductive sector instead of proper utilization in the selected respective sectors.
In some cases, borrowers have adjusted his/her other credits with loans under the low-cost funds, the BB said in its two-page letter.
"We've warned the banks of a possible asset bubble in the near future," a BB senior official told the FE.
He also said that the central bank may seek relevant documents of the loans under the packages from the banks to scrutinise the use of such loans.
The BB's latest move came against the backdrop of the country's capital market that posted the highest returns in the past 12 months in a decade without significant fundamental developments of the underlying stocks.
Between July 23, 2020 and July 25, 2021, the DSEX, the prime index of the Dhaka Stock Exchange (DSE), rose 2,343 points or 57 per cent to settle at 6,424 on Sunday which was the highest since its inception in 2013.
The DSEX was introduced more than eight years back on January 27, 2013, designed by Standard and Poor's (S&P) based on the free-float methodology, replacing the then key index - DGEN.
However, the all-time high DGEN was recorded at 8,918on December 5, 2010, when the market saw a bull run before a crash.
The DGEN witnessed about 80 per cent gain in 2010 before the collapse.
The market capitalisation of the DSE also soared 68 per cent year-on-year to Tk 5,350 billion on Sunday, with the inclusion of some big companies like the largest IPO Robi Axiata.
Talking to the FE, Abu Taher Mohammed Khairul Bashar, CEO at MTB Capital, said that it would help the stock market check the artificial increase of share prices particularly of the fundamentally weak companies as well as save the small investors.