On Wednesday (May 24), Bangladesh Bank issued a directive to banks regarding the reservation of provisions against investment losses in shares, bonds, debentures, and mutual funds of listed companies.
The directive was sent to the managing directors and chief executive officers of all banks operating in the country. According to the central bank’s instructions, if the purchase price of securities, other than government securities, in terms of investment is lower than the latest market value, banks must reserve provisions equivalent to the difference between the purchase price and the latest market value.
This difference in price will be recognized as a loss in investment value. This provision requirement applies to listed shares, bonds, debentures, and mutual funds or any portfolio of funds. Additionally, provisions will be reserved separately for equity shares, bonds, debentures, and mutual funds or any portfolio of listed companies.
In addition, it has been stated that in the case of investment in non-listed equity shares, if the total value of the company decreases, banks must reserve provisions equivalent to the reduced value as a percentage of the investment ratio within the institution, through the medium of the bank. If the invested company ceases to exist or its operations are suspended or deemed non-performing, provisions must be reserved for the same amount as the investment, unless any visible operations are carried out.
Furthermore, the directive specifies that for non-convertible cumulative preference shares, if the bank does not receive the specified interest, dividends, or cash gains as per the agreement, a provision of 25% of the principal amount must be reserved at the end of the first year. For the second year, an additional 25% and a provision of 100% must be reserved if the accrued gains remain unpaid for three years.
According to the recent directive from the central bank, if the average purchase price of be-maturity mutual fund units is lower than the surrender price (the value at which units are returned to the asset management company), banks must reserve provisions equal to the amount of the difference between the average purchase price and the surrender price. In line with these guidelines, banks are required to maintain provisions on a quarterly basis and submit the provision reserve information to the Bangladesh Bank.
This directive, issued under Section 45 of the Bank Companies Act, 1991, will come into effect from June 30th.
