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4 major reasons acting behind liquidity crisis in stock market, say analysts

  • Published at 10:48 pm September 12th, 2019
stock market
Liquidity crisis remains the major reason behind the continued stock price fall Collected

They say there are four major factors active behind the shortage of liquidity in the capital market

The country’s prime bourse the Dhaka Stock Exchange (DSE) has been witnessing a steep fall in recent days due mainly to liquidity crisis, says stock market analysts and operators.

They say there are four major factors active behind the shortage of liquidity in the capital market.

The reasons are: soaring non-performing loans (NPLs) in banks, enhanced bank borrowing by the government due to poor revenue collection, lack of institutional investors, and negative net foreign investment.  

Besides, experts have said that the government’s move to divert state-owned corporations’ funds to the exchequer has worsened the liquidity condition in the banking system. 

In the last few months, foreign investors have been selling shares more than they have been pouring in the market. Besides, lack of efforts to bring institutional investors to the floor is other major factor hampering the normal growth of the stock business.

Meanwhile, investors’ confidence is battering, which triggered panic sell-offs, amid the depressed market outlook. Stock investors are grappling with the volatile financial market; risk-averse investors continued their selling spree on large-cap stocks and falling foreign portfolio investment continued selling their holdings, market operators have said.

They also said that the investors have been grappling with the prolonged bearish trend of the market, liquidity crisis in the country’s financial sector, and Grameenphone’s tussle with the telecom regulator BTRC.

The prime bourse, DSEX lost 282 points in the last 19 trading days or after Eid-ul-Azha and its market capitalization lost Tk18,123 crore.

Rise in NPLs

Former chairman of Bangladesh Securities and Exchanges Commission (BSEC) Faruq Ahmed Siddiqi told Dhaka Tribune: "The financial sector (bank and non-bank) provides a big support to the stock market. But the sector is not performing well as investors are suffering from confidence crisis due to soaring NPLs in the banking system.

NPLs of banks rose by a staggering Tk1,551 crore in three months till June this year, taking the amount of stress loan in the banking sector to Tk112,425 crore.

As of June, the total bad loans accounted for 11.69% of the total disbursed loans of Tk9,62,077.26 crore, according to the latest Bangladesh Bank (BB) data.

“NPLs and government debt from banks keep rising, triggering the liquidity crisis to rise in the capital market,” he said. 

In August, the foreign investors sold shares worth Tk279 crore against their purchase of shares worth Tk176 crore. In July, they bought shares worth Tk309 crore against their sales worth Tk474 crore.

The net foreign investment dipped to Tk102 crore negative in August after Tk164 crore negative in July.

Worried institutional investors

Secretary General of the Bangladesh Merchant Bankers Association (BMBA) Khairul Bashar Abu Taher Mohammed told Dhaka Tribune: "The institutional investors also maintain a cautious stance due to the ongoing liquidity crunch."

Professor Mizanur Rahman of the Department of Accounting and Information Systems at Dhaka University said: "The financial institutions are unwilling to invest in the market now as they fear further pressure on them.

"The quality of banks’ assets is questionable and their operating cash flow is  also very low, which ultimately create more pressure on future liquidity," he explains.

“All steps taken so far have become ineffective due to a liquidity crisis of financial institutions,” he noted.

Dhaka Stock Exchange (DSE) Director Rakibur Rahman told Dhaka Tribune: "Banks are not looking to invest in the stock market, as their financial conditions are not good. On the other hand, there is no liquidity coming from the Investment Corporation of Bangladesh (ICB) to intervene the market.. 

“To overcome the liquidity crisis, the bond market has to be developed” he added. 

Highlighting on the recent sluggish trend in the country's capital market, honorary professor at Dhaka University’s economics department Abu Ahmed said: "A selling pressure has been in place as investors have continued to dump their holdings to avoid further losses. It is also a major factor of stock falling among others."

Decision to utilize govt institutions' idle money

Recently the government decided to divert state-owned corporations’ funds worth Tk2,12,100 crore to the exchequer despite the fact that the country’s financial sector has been suffering from liquidity crisis.

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