Share purchase loans are very risky, bankers say

KATHMANDU, JUN 02 -

Bankers have said that providing loans to stock investors against the guarantee of stockbrokers will be ‘very risky’ as the Nepali capital market is ‘not mature enough for such lending’.

The Finance Ministry on Thursday introduced a provision, allowing banks and financial institutions (BFIs) to extend loans to stock investors against stockbrokers’ guarantee.

Under this arrangement, investors will have to make a certain investment on their own to get such loans. However, it is not clear how much investment should investors make initially and how many guarantees stockbrokers can pledge.

Bankers say the domestic market lack enough depth for such lending. “The Nepali capital market lacks depth for such things to happen,” said Sashin Joshi. “In Nepal Stock Exchange (Nepse), it is virtually impossible to find buyers in adverse situations.”

According to bankers, there are only a few liquid stocks in the exchange which will find buyers on any given date. “We have seen even the most liquid shares struggling to find buyers if a big selling order, say 10,000 shares, is placed,” said Joshi. “This will make banks’ such loan portfolio much risky.”

Joshi also expressed concern about the credibility of Nepali stockbrokers in terms of the size of their balance sheets and net worth. “Recently, when stockbrokers were asked to increase their net worth to Rs 10 million to be eligible to get depositary participant license in the central depositary system, they opposed to it strongly,” said Joshi.

Currently, stockbrokers should have a paid-up capital of Rs 2 million to get brokerage license.

In the international market, stockbrokers get approval from banks to offer loans investors on the basis of their balance sheet size and credibility.

Banks themselves determine the credit threshold based on the volatility of the capital market and individual share. If there is a fall in share price,

brokers issue margin calls and investors either have to increase their investment margin or close out their position by selling their stock.

Nabil Bank Chief Investment Officer Bhuvan Dahal also said with the current level of paid-up capital of brokers, such loans will be highly risky. “However, we are yet to get the circular from the Nepal Rastra Bank (NRB) regarding the details about such lending,” said Dahal. “Only after getting the details, we can more clearly state our stand.”

Stockbrokers, however, said they can increase their paid-up capital if required. “Currently, our business is limited to facilitating share trading, and our paid-up capital is enough for the job,” said Anjan Raj Poudyal, president of Stock Brokers’ Association of Nepal. “Once we get new business opportunities we can increase our paid-up capital as well as the net worth.”

Source: The Kathmandu Post