Banks should be out of pre-IPO investment

Posted by BankInfo on Tue, Jan 04 2011 08:08 pm

Professor Mohammed Farashuddin, Former governor of Bangladesh Bank, has called for imposing a strict limitation on scheduled banks' investment in Initial Public Offerings (IPOs) only and bringing them out of pre-IPO investment as it is creating only asset inflation in the economy. He was speaking at tenth Nurul Matin Memorial Lecture on 'Ethics in Banking', organized by Bangladesh Institute of Bank Management (BIBM) in a city hotel Monday.

"Banking Ethics has been put in the cold storage by commercial banks in diverting good part of their advances in non-IPO shares and making abnormal margin in a chaotic stock market", Dr. Farashuddin said, adding that such practice bars stock market's capacity of capital or equity formation. "Limiting commercial banks' involvement in IPOs and ensuring the limited exposure is channeled through properly formed and supervised subsidiaries should be in order along with regular surveillance on Small and Medium Enterprise (SME) fund to stop its diversion in consumer goods and non-IPO investment", he suggested.

Dr. Farashuddin also asked for scrutinising SME fund's performance not only in terms of providing working capital, but also from the aspect of creating newer enterprises. He also emphasised on further strengthening of Bangladesh Bank's supervisory capacity as well as additional operational independence and asked the government's attention for separate compensation package for central bank officials. "BB should be relieved from the duty of 'auxiliary assistance in socio-economic development' which will enable it to concentrate more on monetary policy and bank supervision objectives", Dr. Farashuddin said.

The speaker brought the issues of depositor's representation in board of directors, double-digit spread of interest, political intervention in sanctioning and waiving loan, excessive loan taken by equity-holder directors, commercial bank's BASEL-II compliance in his speech. Dr. Farashuddin also suggested for forming Asset Management Company for dealing with Non-performing Assets (NPAs), offloading nationalised commercial bank's share and exposing them in competition for efficiency, BB's involvement in assessment of scheduled bank's chief executives, limiting spread of interest to 6-7 per cent, and finalising merger law and enforcing it simultaneously with capital adequacy requirement. Concurring with the speaker's suggestion, BB governor Dr. Atiur Rahman, chair of the function, said, "BB is pursuing equitable and inclusive growth by engaging private banks in socially desirable lending and creating ground for tomorrow's profitable business".

Former governor A.K.N Ahmed was present as the chief guest and suggested to ensure ethics in policy making level in banks and keeping banks' growth in line with society's growth. BIBM director general Dr. Toufic Ahmad Choudhury welcomed all. Bankers, eminent economists, representatives from civil society and BB top officials were also present.

News Source: Financial Express/05 Jan 2011