Margin Loan Borrowers won’t face margin calls even if share price decreases by 20%; NRB issues circular to all BFIs

Investors who have borrowed margin type loans by keeping their shares in collateral will now be facing fewer margin calls, thanks to Nepal Rastra Bank (NRB)’s latest directive. In line with the provision made in Monetary Policy of 2075/76, NRB has issued a circular directing all A, B and C class BFIs that they are not liable to margin calls to the loanees unless the value of share decreases by more than 20%.

The investors will not have to face the repeated margin calls from the banks asking them to maintain the margin even in case the share price decreases by up to 20%.

Previously, the provision for making margin call was set at 10% of the share price. NRB has, however, decreased the total loan portfolio a BFI could have as margin type loans. BFIs can now only provide margin loans up to 25% of their core capital. Such limit was 40% last year. NRB has directed the BFIs to bring this under limit within Poush 2075.

Despite of the decrease, the banks still have the capacity to float more than Rs 50 arba as margin loans in the market.

However, for the investors who are involved in the transaction of shares through the amount of loan taken as individual overdraft, the case will not be similar from today. The monetary policy has decreased the amount of individual overdraft to Rs 50 lakh from the previous limit of Rs 75 lakh.

The individuals whose overdraft amount already exceeds Rs 50 lakh need to decrease the amount to Rs 50 lakh till Poush end. It will be a good start to the fiscal year for some investors while a problematic start for some.