Loan against shares increases

KATHMANDU, FEB 28:

The bullish stock market has prompted financial institutions to increase loans floated against shares in the first half of the fiscal year.

Even without the participation of commercial banks in margin lending, loans floated by finance companies and development banks have pushed loans extended against shares up by nine per cent in the first half of the current fiscal year.

The amount of loans floated by financial institutions has reached Rs 8.28 billion in the first six months of the current fiscal year. The amount stood at Rs 7.4 billion at the beginning of the fiscal year. Despite, the increased amount of auction of shares pledged by defaulters of loans, the amount of loans against shares has grown steadily since the beginning of the fiscal year.

Since the authorities — Nepal Rastra Bank 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.

“Share prices and transaction volume have increased since margin lending started,” pointed out managing director of Kohinoor Investment — a brokerage firm — Bharat Ranabhat. The average transaction volume so far this fiscal stands at around Rs 90 million.

“Even on a slow day, Nepse handles trading worth Rs 100 million,” he added.

Most of the large and seasoned investors are using margin financing to purchase shares. In the present set-up, financial institutions provide 60 per cent of the amount required to buy shares while 40 per cent has to be furnished by investors themselves. The amount is lent to investors the very next day of the transaction even while the share transfer is in a blank transfer state, provided brokers substantiate the transfer has been made.

Financial institutions are charging up to 14 per cent interest for loans against shares. “The profit booking tendency among investors has increased of late as investors sell shares as soon as they feel they have made enough to pay for the loan and some surplus as returns,” said Ranabhat.

Earlier, financial institutions provided loans only after the borrower pledged the shares as collateral — commercial banks are still following the provision. Investors did not get money to buy shares as they had to make full payment for the shares.

Last April, investors pressured the regulators to allow margin type lending for share purchase as a measure to tackle the bearish pressure on the stock market. It took regulators about three months to give a green signal on the matter. 

Source: THT