Liquidity crunch in financial institutions hits margin financing

KATHMANDU, MAY 11:

Margin financing for stock trading has been hit hard as financial institutions are not willing to lend for share purchase due to the approaching liquidity crunch.

“Investors are having a difficult time getting loans as financial institutions have almost stopped issuing margin type loans for share purchase of late,” said president of Stock Brokers’ Association of Nepal Narendra Raj Sijapati.

“Financial institutions express their inability to give larger loans citing liquidity concerns when brokers refer the investors for margin-type loans to them,” he added.

The tight rein on margin type lending by financial institutions can be attributed as one of the factors aiding the current freefall of share prices at the stock exchange. By mid-March, financial institutions floated loans worth Rs 7.86 billion against shares, according to data published by Nepal Rastra Bank (NRB). This amount is Rs 420 million lower than the lending of similar loans a month earlier.

“As of early May the situation has become worse,” said another broker Bharat Ranabhat.

Earlier, despite the absence of commercial banks in margin financing, loans floated by finance companies and development banks had pushed the amount of loans extended against shares consistently up. Moreover, the bullish stock market had prompted financial institutions to increase loans floated against shares by the first half of the fiscal year.

“Financial institutions are not easily providing loans as they used to a few months back. If we recommend for loans worth Rs five million they only lend half the amount,” said Ranabhat.

Financial institutions provide 60 per cent of the amount required to buy shares while 40 per cent has to be furnished by the investors themselves.

Since the authorities — NRB and Securities Board of Nepal — allowed financial institutions to provide margin financing to investors based on brokers’ guarantee, the Nepse index has appreciated by 40 per cent and even pushed up transaction volume.

However, since the last one month, the market index has been steadily retreating and is below 490 points.

As the less than expected amount of deposit growth has made balancing credit to deposit ratio a difficult act, the amount of loans floated tend to suffer. The slowing deposit growth has led financial institutions to offer higher interests for deposits.

“It is not preferable for financial institutions to provide loans at 14 per cent interest when deposit rate is headed for double digit,” said a CEO of a finance company referring to the understanding to charge not more than 14 per cent interest on margin type financing for a year.

“Moreover, towards the end of the fiscal year, financial institutions avoid giving short-term loans due to the need to provision one per cent of each loan which wipes away the profit gained by earning the interest in the last two or three months,” said the CEO.

However, investors are hopeful that the situation will improve soon and the stagnation of margin financing will be temporary. “This could be a seasonal phenomenon as financial institutions

avoid lending short-term loans towards the end of the fiscal year for low incomes from interests,” said president of Nepal Investors’ Forum Raj Kumar Timilsina.

“The pressure to maintain credit to deposit ratio might have also discouraged financial institutions, but things will be better once the money stuck in government accounts flows into the market,” he added.

Source: THT