Banks’ investment in listed, non-listed securities: BB issues guidelines on provisioning

The Bangladesh Bank (BB) issued a circular on Wednesday regarding banks’ maintenance of provisioning against investments in listed and non-listed securities.

In the circular, the central bank said that provisioning for listed securities, including shares, bonds, debentures, and perpetual instrument mutual funds, must adhere to the mark-to-market system.

Mark-to-market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions.

For instance, if a share is purchased at Tk 12 and its last traded price is Tk 10, banks should provision for Tk 2.

A senior official at the BB told the FE that the latest circular consolidates various previously issued circulars.

“Actually Wednesday’s circular is the alignment of all previously issued circulars,” said the official familiar with the development.

For non-listed securities, banks are required to provision based on the company’s net worth, which represents its wealth measured by assets minus debt obligations.

Banks should also provision for any decreased values of non-listed securities. In cases where the company no longer exists, banks should provision an amount equivalent to the total investment.

For non-convertible cumulative preference shares, if there is no profit or dividend by the company as per the agreement, banks should provision at the rate of 25 per cent for the first year.

In the event of consecutive non-payment of dividends or profits for a second year, banks must increase provisioning by an additional 25 per cent.

If this situation persists for a third year, the provision rate will be 100 per cent, as stated in the BB circular.

For non-convertible bond/debenture, banks should maintain provisioning at a rate of 25 per cent if there is no coupon payment in the first year.

If the situation continues into the second year, banks should increase provisioning by an additional 25 per cent. If no coupon payment occurs in the third year, banks must provision 100 per cent of the bond/debenture value.

Regarding open-end mutual prices, banks will provision based on the differences between average prices and surrender prices.

These provision rates will be effective starting from June 30, 2023.

The circular also eliminates the previously issued circulars by the Department of Offsite Supervision (DOS) on March 12, 2015, and June 28, 2015.

jaismharoon@yahoo.com