Nepal’s depreciating share market: causes and way forward

Mon, Feb 18, 2019 5:17 PM on Exclusive, Featured, Stock Market,
Advocate Udayan Regmi  
Founding Partner
Associate Hub

Nepalese, and especially the urban dwellers, have always demonstrated interest in the share market. Recently the market is demonstrating its volatile nature to the utmost. Once a ‘bullish’ (appreciating) trend; share market in Nepal has these days become ‘bearish’ (depreciating) as termed in the share market.  The capital market which used to hover around 1800 points is as low as to around 1100 points these days. It is needless to say that the current communist government seems to be falling short in making the market grow to its previous level. Capital market is considered to be one of the parameters to measure development of a nation and thereby with the current trend; Nepal is lagging behind in development as well. This situation is not caused by anything done singlehandedly but is the result of several factors as discussed below.

Failure of the local government

When the local governments were formed, it was expected that these bodies would speed up the developmental work. However, the local government failed in fulfilling this mandate as expected that eventually resulted in slow spending of capital expenditure. The government has instructed the parliamentary committees to spend 60 percent of the allocated funds in second quadrimester, 90 percent by mid-May and 10 percent in last month of fiscal year. Despite such instruction, the government is only able to spend 19 percent of total allocated budget until the last remaining 4 months of the fiscal year.

Banks and fixed deposits

Banks and financial institutions are offering higher interest rate on fixed deposit to curb the liquidity crisis. Presently, these rates have become double-digit-number. Due to this reason, investors are not risking their capital by investing in the capital market and are enjoying the lucrative scheme of the bank and are rather happy parking their money in banks as fixed deposits.

Increasing imports

Nepal had imported automobile worth Rs. 8.28 billion until the end of two and half months of current fiscal year.  Investment in luxurious items is regarded unproductive as it will only cause outflow of the currency with having no benefit in the national economy. 

Provisions of NRB

Stringent provision on Monetary Policy (MP) of Nepal Rastra Bank (NRB) in regards to marginal lending is also considered as a reason for the downfall of share market. In the fiscal year 2073/74, banks and financial institutions were allowed to extend margin lending against the collateral of share up to 100% of its core capital. In fiscal year 2074/75 NRB reduced it to 40% of its core capital. MP of fiscal 2075/76 banks had a provision which allowed banks to lend to 25% of its core capital. A little relief to these, NRB has issued a circular on 2075/09/11 and allowed banks to sanction marginal loans upto 40% of the core capital. Until the issuance of this circular, the banks were not able to extend loans beyond 25% of its core capital and this had caused lack of interest of the investors and they were not being able to pour more money in capital. This circular to a certain extent can be regarded as a praiseworthy step of government towards capital market.

 

Way Forward

Firstly, the government should make utilization of the untouched money parked in the government coffer to make the capital market grow. As mentioned above, the government is only being able to spend 19% of its budget in developmental work. Unless there is adequate money in the market, it is impossible to make a capital market grow. 

The government should make more people involved on the secondary market. Unlike primary market, it is lengthy process to make a transaction in secondary market. It takes less than 2 minutes to apply for initial public offering (IPO) in primary market compared to secondary market. As a result, an overwhelming number of people are ready to buy a stock in primary market and less number of people in secondary market. That is why whenever there are announcements of IPO by any company, there are oversubscriptions by 10 fold. To solve this problem, government should make the trading procedure online, which will enable people to have an access to trade their shares more conveniently. This would also make it easier for the Nepalese citizen residing outside the country to invest in stock market of Nepal. Additionally, the government should also speed up the work to provide brokerage license to the commercial bank and make it more accessible and achievable.

As Nepal’s stock market is guided by more by the rumor and less by the fundamentals of the market, government should create a systematic work procedure and provide financial literacy trainings that will help investors to understand the fundamentals of the market without running after hearsays. Last but not least, the regulatory of mutual funds should operate the funds to ensure they are not parked in the unproductive sectors.