BB makes investing in startups easier now

October 19, 2020 09:52:06

| Updated:

October 19, 2020 20:10:01

The central bank on Sunday said the new ‘risk weight’ applicable to investing in ‘alternative’ investments will remain valid until September, 2022 beginning from the third quarter of this year.

An alternative investment is an investment in any asset class, excluding stocks, bonds and cash.

Industry insiders said allowing such weight for two years for preparing the bank balance sheet contradicts the spirit of the alternative investment.

However, the Bangladesh Bank said banks will have to submit its capital adequacy report adjusting the new risk weight from the third quarter.

The central bank said it has rationalised input template in this connection available on its web. It said banks can download it from the web portal.

Earlier, the central bank had slashed risk weight for maintaining balance sheets of banks by 50 per cent to 100 per cent.

The BB said the reduction in measuring capital is intended to expand alternative investments in the country.

The venture capital, private equity, impact investment, leveraging buyout are a few of them, which are now gradually becoming popular.

Such investment is usually believed to be risky as they mostly deal with startups.

People familiar with the matter said that higher risk weight usually discourages banks from investing in alternative investment.

This new order will encourage banks to form funds for alternative investments to invest in private equity, impact investment, leveraging buyout and venture capital.

Under the new risk weight, banks will now have to provision 100 per cent of their investments in such types of vehicles instead of 150 per cent.

The Banking Regulation and Policy Department of the BB issued a notice with an amendment to the guidelines for risk-based capital adequacy (revised regulatory capital framework for banks in line with Basel III).

When contacted, Syed Maahbubur Rahman, managing director at the Mutual Trust Bank, told the FE, “We’re operating commercial banking in Bangladesh, and the alternative investment is a new area in which we’ve little or no experience.”

He said the central bank’s latest circular will encourage the banks to form such funds for the startups.

He said the government may also explore other avenues through its budgetary allocations to promote the startups.

Shakawat Hossain, founding managing director at BD Venture Capital, told the FE that alternative investment is usually a long-term investment.

He said the circular giving two years for the banks is contradictory to the spirit of the alternative investment.

Banks and other fund-providing organisations, lenders or individuals form funds to invest in alternative investments. They usually invest in startups and tech-based industries.

Bangladesh has a licence of 17 venture capital firms, while three each are of impact investment firms and private equity groups.

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