Write-offs needed to liberate market from negative equity burden
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Writing off bad debts behind negative equity partially or fully is the ultimate solution of the problem that has been gnawing away at the market's growth potential for more than a decade.
Market intermediaries -- merchant banks and brokerage firms -- have sought time extension repeatedly to meet the provisioning requirement against unrealized losses in margin accounts but they have failed to make any progress.
In the meantime, the problem of negative equity has intensified instead of ebbing away, requiring higher provisions if time extensions were not granted.
The outstanding negative equity against margin loans taken for investments in the equity market stood at Tk 66.3 billion in September last year. The figure rose to Tk 97 billion by October this year for the persistent fall of stocks amid a bleak economic outlook.
The fifth-time extension will end in January next year. Now, stockbrokers propose another time extension up until 2030 to gradually increase provisions to make it 100 per cent against unrealized losses.
Market experts, however, say the sixth-time time extension would not make things any better.
Talking to The FE, a commissioner of the Bangladesh Securities and Exchange Commission (BSEC), preferring not to be named, said it had received proposals for another time extension but no detailed plan to settle the matter.
He said the market watchdog this time would demand a permanent solution instead of keeping the matter hanging until 2030. "Alongside provisioning, bad debts that caused negative equity will have to be written off," recommended the commissioner.
Saiful Islam, president of the DSE Brokers Association, which recently submitted a proposal for time extension to 2030, acknowledged the need for write-offs of debts, which had been disbursed to margin accounts and had turned sour.
He said the lenders would settle the matter through provisioning and write-offs within the extended time.
Past records engender skepticism
Market insiders are skeptical about the pledge that the matter of negative equity would be settled by 2030 because of the previous records.
A greater portion of the negative equity was an outcome of the 2010-11 stock market debacle.
In the last nearly 14 years, the broad index of the Dhaka bourse witnessed the highest return -- 21 per cent or 949 points -- in 2020, followed by a 20 per cent or 1138-point index gain the year after.
The country's equity market performed better than other frontier and many developed markets in the years due to the injection of idle funds as business activities remained stalled following the outbreak of Covid-19.
But the intermediaries did not utilize the opportunity at the time for the settlement of negative equity.
Parent companies must allow write-offs
Parent companies of brokerage firms and merchant banks have to come forward to address the problem of negative equity.
Margin loans were mostly disbursed by subsidiary merchant banks and brokerage firms on receipt of loans from parent companies -- banks or other financial institutions.
The subsidiaries worked as special wings of the parent companies until 2011. Then they were made into subsidiaries in compliance with a regulatory directive.
Before the separation, the disbursement of margin loans was done under the direct supervision of the parent companies.
"The money that was given in margin loans came from the funds of parent companies. That's why the boards of those companies have to make a move to settle the matter of negative equity through write-offs," said Md. Rezaur Rahman, a director of AIBL Capital Market Services.
AB Investment, a merchant bank, is going to place a proposal soon before the board of its parent company AB Bank Ltd. to reduce the burden of negative equity.
Md. Fazlur Rahman, vice-chairman of AB Bank, said the banks had once survived relying on profits earned from the market through their subsidiaries.
The subsidiaries had fallen into trouble as the parent companies took away the profits.
"The subsidiaries could run operations smoothly if the regulator did not allow withdrawal of profits by parent companies. Now, there is no solution to negative equity except for write-offs," Mr Rahman added.
DBA's proposal
In a letter sent to the securities regulator on December 10, the DBA said that if the provisioning requirement is no longer kept relaxed, brokers will have to set aside the money in one year from February. In that case, stockbrokers will endure huge losses.
"It will weaken the financial health of the stockbrokers and the overall brokerage industry," reads the letter.
If the timeframe is extended, 5 per cent provision will be ensured in 2025, 10 per cent in 2026, 15 per cent in 2027, 20 per cent in 2028, 25 per cent in 2029, and 25 per cent in 2030, said the DBA.
Who are responsible for negative equity?
The managements of brokerage firms and merchant banks are primarily responsible for the negative equity as many of them disbursed loans imprudently without weighing the risks.
In many cases, loans were provided based on relations and the stipulated limits of loans were not followed.
Managing Director of the Investment Corporation of Bangladesh (ICB) Md. Abul Hossain said the situation would not have been so miserable had the boards of the subsidiaries properly managed debts.
The board members of the subsidiaries also did not report to the boards of the parent companies when the status of margin loans had gone worse.
"So, the boards of the subsidiaries cannot avoid their responsibility," Mr Hossain said.
Moreover, there was no scope of negative equity as the lenders were supposed to sell the assets in margin accounts before their worth went below the amount of money lent.
But after the market collapsed, the regulator verbally instructed lenders not to conduct sales in the margin accounts, assuring them of market rebound, but that did not happen.
Then the apex court issued orders for not executing any trigger sales from margin accounts. Some experts also expressed sympathy towards the investors who invested in stocks with margin loans. Many media reports went in favour of the sentiment.
Almost all stakeholders are to share the blame for the miseries caused by the negative equity hampering the growth of the secondary market.