The government is set to strategize the issuance of a sovereign guarantee for Tk 50 billion to support the state-run Investment Corporation of Bangladesh (ICB), to revitalize the struggling capital market, according to informed sources.
The loan, to be obtained from the (BB) at a favorable 4.0 percent interest rate, will be backed by a sovereign guarantee from the finance ministry. A senior official of the Financial Institute Division (FID) confirmed that the finance ministry would act as the sovereign guarantor for this loan.
FID to Discuss Guarantee Issuance for Crucial ICB Loan
A pivotal meeting is scheduled at the FID tomorrow (Thursday) to discuss the guarantee issuance. This strategic move is intended to secure the necessary funds, with the FID secretary presiding over the session.
The state-run entity will secure this long-term loan at a 4.0 percent interest rate, under the finance ministry’s guarantee. The ICB is facing significant losses due to multiple factors, necessitating this financial injection to transform the loss-making agency into a profitable venture. The ICB has already submitted a proposal to the BB for the required funds.
ICB Managing Director Md Abul Hossain stated, “We have already presented our action plan to the FID detailing the utilization of the loan. We have formally requested the loan.” The ICB’s current debt stands at approximately Tk 120 billion, owed to both government and private banks, including various agencies. The high interest rates on these loans make it unsustainable for the ICB to continue operations relying solely on bank loans, prompting the need to explore alternative funding sources.
The institution must pay around Tk 1.0 billion in interest to banks each quarter. The finance ministry has expressed a positive outlook on the loan request.
Current Financial Metrics
- Debt as of March 31, 2023:
- Government Debt: Tk 817 crore
- Private Bank Debt: Tk 311 crore (down from Tk 357 crore in June)
- Net Loss (First Nine Months of FY24): Tk 267 crore
- Interest Expense (FY23): Tk 675 crore
- Interest Income (FY23): Tk 136 crore
- Net Interest Expense: Tk 538 crore (negative)
The loan, if granted, is expected to allocate Tk 25 billion towards repaying bank loans, with the remaining amount directed at bolstering the share market. This financial maneuver is poised to stabilize and rejuvenate the ICB, injecting much-needed vigor into the capital market and fostering a positive economic outlook.
ICB Outlines Action Plan in Loan Application to Finance Ministry
Previously, the Bangladesh Bank (BB) stipulated that it would only entertain the ICB’s request for a Tk 50 billion loan if the government provided a sovereign guarantee. This condition was communicated to the ICB in a letter dated June 13, in response to their plea for financial support.
The ICB, on May 21, sought this substantial loan from the central bank to stabilize the equity market and repay high-interest loans previously secured to support market stability.
Recently, the ICB submitted a detailed application to the finance ministry requesting a sovereign guarantee. This application includes a comprehensive action plan for utilizing the proposed funds and a strategy for loan repayment.
The state-run investment bank has been grappling with a severe financial strain, burdened by costly loans acquired from both state-run and private commercial banks, among other sources. Officials at the ICB have outlined that approximately 50 percent of the requested funds will be allocated to the capital market, while the remaining 50 percent will be used to settle existing high-interest loans.
Following the stock market crash of 2010, the ICB had amassed funds at elevated interest rates to bolster market stability. This led to a significant mismatch between the growth of interest expenses and income. Between FY10 and FY23, the ICB’s interest expenses surged at a much higher rate than its interest income, culminating in interest expenditures that nearly doubled its operating income by the end of FY23. For instance, the ICB incurred Tk 8.14 billion in interest payments in FY23, while earning only Tk 2.24 billion from its investments, resulting in a substantial financial deficit.
Interest Expenses Surge to Double Operating Income
Earlier this June, the Bangladesh Bank (BB) set a critical condition for considering the Investment Corporation of Bangladesh’s (ICB) request for a Tk 50 billion loan: a sovereign guarantee from the government. This stipulation was conveyed in a letter dated June 13, outlining that no loans could be approved without adequate collateral and government backing, as per the Bangladesh Bank Order of 1972.
To proceed, the ICB must first secure the sovereign guarantee before reapplying to the central bank for the requested funds. The ICB’s application, submitted on May 21, aims to utilize the loan to stabilize the equity market and settle high-interest loans previously incurred to support market stability.
ICB officials have announced that should the loan be approved, approximately half of the funds will be allocated to reinvigorate the capital market, while the remaining portion will be used to repay existing high-interest loans. This strategic move aims to address the financial strains that have plagued the corporation since the 2010 stock market crisis.
Loan Request and Conditions
- Loan Amount Requested: Tk 50 billion
- Condition Set by Bangladesh Bank (BB): Sovereign guarantee from the government
- Date of BB’s Condition: June 13
- ICB’s Application Date: May 21
- Purpose of Loan:
- Stabilize Equity Market
- Repay High-Interest Loans
In the aftermath of the market debacle, ICB had procured funds at elevated interest rates, investing heavily to stabilize the market. Unfortunately, this decision led to a significant imbalance: between FY10 and FY23, the growth in interest expenses far outpaced the increase in interest income. By the end of FY23, the corporation’s interest expenditure had surged to nearly twice its operating income. For instance, in FY23 alone, ICB paid Tk 8.14 billion in interest on borrowed funds, while earning only Tk 2.24 billion from its investments. This financial discrepancy resulted in ICB recording its first-ever loss for Q1 of FY24.
A Strategic Compromise to Revitalize Capital Market
While ICB has long sought a Tk 5,000 crore loan to address liquidity challenges in the stock market, the government’s decision to act as a guarantor instead of providing a direct loan represents a strategic compromise. This backing is expected to bolster ICB’s financial stability and catalyze a positive turnaround, injecting renewed vigor into the capital market and enhancing investor confidence.
As of the third quarter ending March 31, 2023, ICB’s debt remained at Tk 817 crore to the government, unchanged from the previous June, while debt to private banks decreased to Tk 311 crore from Tk 357 crore. This reduction signifies a repayment of Tk 46 crore in the first nine months of FY2023-24.
The corporation’s financial report for this period revealed a net loss of Tk 267 crore, a stark contrast to the Tk 49 crore net profit recorded during the same period the previous fiscal year. This downturn is primarily attributed to a significant interest expense of Tk 675 crore on loans and deposits, while interest income amounted to Tk 136 crore, resulting in a negative net interest expense of Tk 538 crore.
