Loan against shares rises

KATHMANDU, NOV 24: 

The bullish stock market has increased the amount of loans against shares extended by commercial banks, even though the banks have not participated in margin type lending through brokers.

The amount of loans floated by commercial banks increased by almost 24 per cent in the first quarter of the current fiscal year, in comparison to the amount floated at the end of last fiscal year, according to the unaudited figures of the banks. 

The portfolio of such margin type loans increased by more than Rs one billion, in the review period. 

By the end of the first quarter, banks have lent Rs 6.17 billion against the collateral of shares. The amount stood at around Rs 4.97 billion by the end of last fiscal year. In the first quarter of the current fiscal, share prices have increased substantially as the Nepse index has appreciated by 20 per cent.

Earlier, when the stock market was not doing well, banks were apprehensive about keeping shares as collateral due to the fear of not being able to recover the principle sum. However, rising share prices have appreciated the value of the collateral for banks. 

Despite the market being lucrative at present, commercial banks have yet to start margin type lending based on brokers’ guarantee, which was introduced in July.

“There are about 15 financial institutions actively involved in providing loans against shares based on brokers’ guarantee, but there are no commercial banks involved,” said managing director of Kohinoor Investment –– a brokerage house –– Bharat Ranabhat.

“But of late, some commercial banks seem to be interested and might start lending soon,” he added. 

According to new provisions, 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. The financial institutions have an agreement with brokers to furnish the proof and amount of purchase by investors who obtain 60 per cent amount the very next day. Earlier, banks provided loans only if the investor furnished a share certificate, had made full payment for the share, and had got it transferred.

“The scheme has become popular among investors and half of total transactions in our brokerage has increased due to margin type lending,” said Ranabhat. 

Financial institutions are charging 12 per cent to 16 per cent as interest rate for loans against shares.

Source: THT