Margin Lending of BFIs and its effects in Nepalese Capital Market (Summary)

 NRB brought provision that an individual or institution can take margin nature loans against collateral of
shares up to Rs. 40 million from one financial institution and Rs. 120 million from entire financial system for
purchase of shares.
 The reason behind this provision was said to minimize the credit risks of such loans and enhance its access to
small investors.
 In many countries, margin lending facilities are provided by capital market players i.e., brokerage firms, Non-
Banking Financial Companies (NBFC).
 The loan provided by BFIs for the last two and half years reflects that portion of loan is around 1-2.5 percent
of total loans and advances and around 23 percent of the core capital.
 There is a positive relationship between the amount of margin nature share loan BFIs and NEPSE index.
 The excess liquidity in the banking sectors due to Covid-19, investors were induced to make speculation on
market and promoted for short-term gain. Speculation is done by large investors who have access to
information and control over market.
 The access to unlimited cheaper fund from market give them opportunities for insider trading, cornering, and
spreading rumors.
 The research shows the distribution of loan against shares as on Mid July 2021 replicates just 10 customers are
enjoying 10% of margin lending while more than 8,000 customers are availing just 40% of total loans.

Recommendations

 NRB should develop a strategy to discourage Securities Financing Transactions (SFT) for reinvestment in
same product.
 Quantitative limitations on loan against securities discourage excessive speculation in market using borrowed
fund.
 In the context of COVID-19, where the investable fund is deficient with BFIs, loans like shares, real estate
should be abstained.

Conclusions

 The development of capital market is warranted only when saving is mobilized rather than borrowed fund
from BFIs.
 The development of capital market is largely dependent on the performance of companies and their organic
growth. The loan against shares allows the investors to make speculations in the market for short-term gains.
 Taking reference of other south Asian countries, BFIs should provide margin nature loan to meet personnel,
professional and business commitments.

References

Khanal, P. C. (2022). Margin Lending of BFIs and its effects in Nepalese Capital Market. Nepal Rastra Bank
Samachar.