Margin lenders, borrowers worried over falling stocks- April,6,2011

INVESTORS who have invested in shares through margin lending are facing hard times with the domestic capital market wallowing in a prolonged bearish run. Investors are struggling to pay the interest on their loans and bankers fear there might be more defaults. Under margin lending, investors borrow money from banks to invest in the stock market putting up shares as collateral. As per the existing policy, BFIs are allowed to issue loans amounting up to 50 percent of the average market price of the shares in the last 180 days. The lending BFIs have to issue a margin call to borrowers when the price of shares pledged as collateral declines asking them to pay the difference to keep the loan amount at up to 50 percent of the market price. Borrowers have to pay interest on a quarterly basis. Currently, the Nepal Stock Exchange (NEPSE) index is hovering around 350 points compared to 420 points six months ago. “If the secondary market continues to decline, there might be a problem,” said Ashoke Rana, president of the Nepal Bankers Association. “So far, margin lending had not been problematic.” However, there are signs of trouble with one bank publishing an auction notice after it failed to receive the accrued income from margin lending. “Pressure had mounted on investors with the continued downward spiral in the capital market,” said Nanda Kishore Mundada, president of the Nepal Stockbrokers Association. As of now, commercial banks have invested Rs 9 billion in margin lending. The margin loans issued by development banks, finance companies and cooperatives are believed to be greater than those of commercial banks. Most investors usually borrow from BFIs by putting up shares as collateral to make further investments in the primary and secondary markets. “Currently, it is quite hard to pay back loans,” said Sunanda Shrestha, general secretary of the Investors Forum. Nepal Rastra Bank (NRB) has recently relaxed some provisions on margin lending through the mid-term review of the monetary policy. The central bank had allowed BFIs to lend up to 60 percent of the market value of the shares while renewing loans, eliminating the provision of paying back 25 percent of the loan. However, it hasn’t made investors keen on margin lending. According to NMB Bank’s CEO Upendra Poudel, investors looking for margin lending are relatively few in number. Investors’ reluctance to go for margin lending is due to low returns from the capital market. “Few investors are keen on taking margin loans with the higher interest rates being charged by BFIs,” said a stockbroker. At the same time, some stockbrokers said that BFIs were also reluctant to issue margin loans to investors. “BFIs are hardly giving loans as demanded by investors,” said Birendra Raj Kharel, chief of Pragyan Securities. With the market outlook looking pessimistic, investors wishing to pull out of the market are seeking the help of stockbrokers. The brokers have been selling shares put up as collateral with the consent of the investors and the BFIs. “With the market being dominated by sellers, investors are finding it hard to pay back their loans,” said Kharel. “Hence, we’ve been helping small investors who want out.”
Investors are struggling to pay the interest on their loans and bankers fear there might be more defaults
POST REPORT KATHMANDU, APRIL 5