Loan against shares rises

KATHMANDU, JAN 19 :

Even though commercial banks have yet to enter margin financing for share purchase, the amount of loans floated against shares has gone up. 

The amount of loans floated by financial institutions has reached Rs 7.9 billion in the 

first five months of the current fiscal year. Despite an increase in the amount of auction of shares pledged by defaulters of loans, the amount of loans against shares has grown steadily since the beginning of the current fiscal year. 

“Most of the large and seasoned investors are using margin financing for share purchase,” said managing director of Kohinoor Investment — a brokerage house — Bharat Ranabhat.

Since the beginning of the current fiscal year, share prices have increased substantially as the Nepse index has appreciated by 35 per cent. The bull run also coincided with the regulators opening margin financing on brokers’ guarantee. 

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

However, according to new provisions, financial institutions provide 60 per cent of the amount required to buy the shares, while 40 per cent has to be furnished by the investors themselves. Financial institutions have an agreement with brokers that furnish the proof and amount of purchase by the investors who obtain the 60 per cent amount the very next day.

“We have been informed that commercial banks will start margin financing from the third quarter of the fiscal year and we are hopeful their entry will further propel the market,” pointed out Ranabhat. 

Financial institutions charge 14 per cent interest for the financing at maximum. “Since investors can purchase shares worth Rs 100 by putting a mere Rs 40, it has even stoked the demand in the market,” said Ranabhat. 

Easy access to margin finance has also increased the daily turnover in the share market. The average daily turnover of Nepse since the beginning of the current fiscal year stands at Rs 87.7 million. The average daily turnover in fiscal year 2011-12 stood at Rs 44 million.

“Investors now have access to margin finance to purchase shares and that has fuelled the transaction in the share market,” said share analyst Rabindra Bhattarai.

Source: THT