The central bank has relaxed the provisioning requirements for banks against their investment in mutual funds in light of the deteriorating situation of the capital market.

Banks will not have to keep provision for losses against investment in mutual funds if the unit's cost price is equivalent to or lower than 85 percent of its net asset value (NAV) in current market prices, Bangladesh Bank said in a notice yesterday.

Earlier, if the cost price was Tk 10 per unit and its value dropped to Tk 5 in the market, the bank had to keep provision for the Tk 5 loss without considering the NAV of the mutual fund. Now if the NAV goes down to Tk 8.5 or less, the bank does not need to maintain any provision.

Bankers said many banks that have huge exposure to different mutual funds will get more investible funds, thanks to the BB's relaxed rules.

“This is a realistic move for banks at the moment,” Sayeed Ahmed, chief financial officer of Pubali Bank, told The Daily Star.

At present, about 40 closed-end mutual funds worth Tk 4,440 crore are listed on the Dhaka Stock Exchange.

Banks have exposure to Tk 1,125 crore worth of mutual funds, and most of the mutual funds' market value and NAV have gone down far below the cost price.

If the cost price of the unit is higher than 85 percent of the market value or NAV on the basis of current market price, banks will have to keep the provision by following two methods.

First, if the market value is equivalent or higher than 85 percent of NAV on current market price, banks will have to keep the provision by deducting the market value of the unit from the cost price.

Secondly, if the market value is less than 85 percent of NAV on current market price, banks will have to keep the provision by deducting the 85 percent of NAV on current market price from the cost price of the unit.

In case of open-ended mutual funds, banks will not have to provision losses against their investment if the cost price is equivalent or lower than 85 percent of the market value or NAV on current market price.

If the loss exceeds the ceiling of 85 percent, banks will have to keep provision by deducting the 85 percent of NAV on current market price from the cost price of the unit.