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Friday, October 18, 2019

Vulnerable stock market suffers from confidence crisis

THE recent measures to prop up the stock market by the government appear to have failed as the unusual fall of share prices continues to rattle investors. The DSEX, the benchmark index of Dhaka Stock Exchange, slumped to nearly 34-month low to 4,888 points last month, losing 533.61 points or 9.84 percent since July 2. The investors have already lost Tk 31,349 crore in share value. Earlier in May, Bangladesh Bank widened the banks' scope for investing in the stock market as part of efforts to revitalise it. In a circular, the BB said the banks' investment in non-listed securities -- such as equity, non-convertible cumulative preference share, non-convertible bond, debenture and open-ended mutual funds -- would not be counted as capital market exposure. In July, Bangladesh Securities and Exchange Commission, the regulator of the stock market, held a meeting with stakeholders and took 22 initiatives to win back the confidence of investors.
Meanwhile, share prices have been going down due to the ongoing liquidity crisis of financial institutions. These institutions don't want to invest in the market now as they fear further "pressure" in the coming days. The asset quality of banks is questionable, and their operating cash flow is also very low, which will ultimately put more pressure on liquidity. It is only by solving the liquidity crisis by ensuring good governance that banks will find it possible to invest. The financial sector, especially banks and non-bank Financial Institutions (NBFIs) has been facing severe liquidity crunch since February 2018. Banks and the NBFIs are the drivers of the stock market but they have been plagued by rising nonperforming loans (NPLs), scams and lack of governance. NPLs stood at Tk 112,000 crore or 11.50 percent of the total outstanding loans. If rescheduled and written-off amounts are included, the stressed assets of banks would be around 20 percent of the total loans.
However, lack of quality stocks is a key reason behind poor participation of investors in the stock market. It will be more difficult to restore the investors' confidence if the government fails to bring reputed local and multinational companies to the market. Foreign investors are also selling off shares over the last few months due to confidence crisis and the tussle between the Telecom Regulator and Grameenphone over audit claims.