Written by The Banking Post
Regulators are grappling with fresh legal and financial complications arising from loans backed by shares of banks and non-bank financial institutions (NBFIs) that have been merged or are headed for liquidation.
Shareholders of these institutions had earlier taken loans by placing their shares under lien. But with the central bank reducing the paid-up capital of the merged banks to zero—and NBFI shares expected to be ultimately valued at nothing—those collateral-backed loans have become problematic.
The issue was discussed on Sunday at a meeting involving the Dhaka Stock Exchange, Chittagong Stock Exchange, Central Depository Bangladesh Ltd (CDBL), and associations of brokerage houses and merchant banks. Participants were asked to identify potential post-reform risks and submit recommendations to the securities regulator.
The meeting, held at the office of the Bangladesh Securities and Exchange Commission, was attended by the special assistant to the chief adviser, the BSEC chairman, and commissioners.
Industry representatives said lending against shares is a common practice. Securities used as collateral are blocked through brokerage houses and remain pledged under CDBL’s system.
“We don’t need to know who the lenders and borrowers are. Our role comes into play only when pledged shares need to be confiscated due to loan default,” said the CDBL managing director.
Despite shareholders’ equity claims being wiped out in the merged banks, regulators fear lingering complications. A key concern involves loans taken by sponsor-directors and large shareholders using shares of the merged banks as collateral with other lenders.
In such cases, the borrower’s equity value in the merged bank would be zero, while the lender’s claim on the pledged shares could technically still exist—creating legal ambiguity and enforcement challenges.
“That’s why we sat internally to think through possible solutions to this type of problem,” said a senior CDBL official, speaking on condition of anonymity.
The official noted that similar lending practices had been observed in the past and said it would not be surprising if such cases emerged now. The securities regulator has asked CDBL to assess post-merger and post-liquidation impacts involving 14 financial institutions, including subsidiaries active in the secondary market.
Stock exchanges and the depository are expected to hold further discussions to align on next steps as financial sector reforms move forward.
