Banks increase margin loan by 59% against backdrop of liquidity surplus

ShareSansar, August 25:

Commercial Banks of Nepal has increased their margin type lending by 59 percent in the last fiscal year 2070/71 thanks to the bullish trend in the share market and the liquidity surplus in the banking system.

According to the accumulated data of the 30 commercial banks of the country, they have extended a total of Rs 15.05 arba in margin type lending last year, up by Rs 5.56 arba in comparison to the similar type of loan that they have floated in the previous fiscal year.

They had mobilized a total of Rs 9.49 arba loan in the margin type loan in the previous fiscal year 2069/70.

The margin type loan of the banks accounts 1.7 percent of the total loans of the bank that they floated in the last fiscal year 2070/71.

In this type of lending, banks extend funds against the shares and securities collateral and such loan may be used for any purposes.

Bhuvan Kumar Dahal, CEO of Sanima Bank, told ShareSansar that the total exposure to the margin lending was not high. “While you compare with the total market capitalization of the banks, this is not a big amount,” he added.

With the share prices going up in the bullish market and banks and financial institutions (BFIs) flushed with excessive cash due to lack on investment opportunities, the investors are finding it easy to get loans from the banks against their share collateral.

Durga Uprety, an investor, told ShareSansar that the investors are finding it convenient to get margin loans from the BFIs in a relatively cheaper interest rate against the share certificate collateral. “The banks should also provide such loans on the bill of the brokerage firms,” he added.

While state-owned Agricultural Development Bank Ltd, Standard Chartered Bank Ltd, Nepal SBI Bank Ltd, Nabil Bank and Mega Bank did not extend any margin loan last year, NMB Bank has the highest exposure on this type of loan. NMB Bank extended a total of Rs 3.68 arba in the margin type loan.

This is followed by NIC Asia, Prime Commercial Bank and Nepal Bank Ltd. They mobilized Rs 1.7 arba, Rs 1.37 arba and Rs 1.3 arba respectively in that heading.
 
Banks like NIC Asia, Sunrise Bank and Janata Bank, among other commercial banks, have made their schemes on the loans against share pledges public.

The banks have been charging as low as 9 percent interest rate in such loans. Following the Nepal Rastra Bank’s strict regulation some years back on the margin lending, the banks are, however, cautiously dealing with the loans.

“Though there is no limit now set by the NRB currently in terms of banks’ exposure on the margin lending, banks are now themselves careful to float such loans. Generally, banks do not provide loans more than 70 percent of the shares price,” said Sanima Bank’s CEO Dahal, adding that there was ‘margin call’ option left for the banks if the borrower’s pledged securities or shares’ price observes significant downfall in the market.

Margin call refers to the lender's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.