KATHMANDU: The decrease in the amount of loans floated by financial institutions against shares has indicated an urgent need to allow brokers to issue margin loans to investors to stimulate the market. Margin lending by financial institutions against a collateral of non-government securities has gone down by 20 per cent by the second quarter of the current fiscal year.
The benchmark index has shed 20 per cent since the beginning of the current fiscal year as stock prices are simmering at the lowest levels. In mid-July, banks had floated loans worth Rs 8.4 billion under the heading which is down to Rs 7.4 billion by mid-January.
The plunging share prices means investors will get lesser loans and more money will be required by the borrower to maintain the margin.
“At present, looking at the interest rate structure and market conditions, pledging shares
to buy more shares will not be prudent for investors,” said general secretary of the Nepal Stock Investors’ Association Prakash Rajoria.
“Margin lending by brokers which is a global practice is a better alternative in the current situation,” he added. Five years back during the heyday of the capital market, easy availability of margin loans had fuelled the bullish trend of the stock market pushing it to the peak.
Margin lending by brokerage houses is a common practice the world over but, at present, Securities Board of Nepal (Sebon) does not allow brokers to maintain such margin accounts for their clients.
Under margin lending, brokers provide partial loans to clients in order to cover a larger investment than one’s capital could directly cover for a fee. The margin account with brokers acts as leverage for investors allowing them to purchase shares despite being short of cash, thus promoting transactions. However, in Nepal, margin lending is referred to as loans floated by the banks and financial institutions against the collateral of shares.
The capital market regulator is also open about allowing brokers to provide margin lending to their clients provided the brokers have the capacity to lend and absorb the monetary shocks in case of defaults.
Source: the himalayan times
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