The country's scheduled banks are likely to get permanent exemption from setting up subsidiary companies for providing 'security custodial services' as the central bank finds it unnecessary, officials said.

General Manager of the Bangladesh Bank (BB) Abu Farah Md Naser recently sought permission of the Ministry of Finance (MoF) to exempt the banks from July next year once the temporary exemption expires, they added.

Custodial services are specialised financial services for safeguarding a client's financial investment/financial securities like stocks and bonds.

According to the Section 7 (3) of the Bank Companies Act, 1991, the banks need to form separate subsidiaries to provide security custodial services. In this case, they need prior permission from the central bank and get registration from the Bangladesh Securities and Exchange Commission (BSEC).

Officials said the Bank Companies Act, 1991 was amended in 2013 incorporating the provision to reduce banks' involvement in stock markets and separate their stock market-related activities from commercial banking.   

After the amendment of the Act, four foreign banks operating in Bangladesh sought exemption from such an obligation since their head offices are not interested to form subsidiaries considering the size of Bangladesh's stock market.

As the four banks bring major portion of foreign portfolio investment in Bangladesh's stock markets, the central bank agreed to exempt them from the compulsion of forming subsidiaries for continuation of foreign investment.

They were given the exemption for five years, until July 2018, which later was extended to all scheduled banks in the country.

Recently, two foreign banks again sought the central bank's permission for continuing security custodial services for an indefinite period without forming separate subsidiaries.

Mr Naser, in his letter to the MoF, said other banks also may seek similar facility again soon. The reasons, which were taken into consideration in the past before granting exemption to the banks, still persist.

Besides, since the custodial services providers do not provide loans in stock market, the banks do not have the scope for exposure in the bourses, he noted.

Mr Naser also said the central bank considers positively granting exemption to the banks from forming separate subsidiaries.

He also said the permanent exemption to all the scheduled banks from the concerned clause of the Bank Companies Act 1991 can be granted once the current temporary exemption expires next year.

A senior MoF official told the FE they are examining the clause concerned of the Bank Companies Act based on the central bank's proposal.

Permission will be given for permanent exemption to the banks if the proposal is found rational and not conflicting to other clauses, he noted.