The Securities Board of Nepal has allowed stockbrokers to provide loans to their clients to buy shares. Issuing a guideline last Friday, the board gave the go-ahead to brokerage firms to engage in margin lending.

Margin trading allows investors to buy shares by borrowing money against stock as collateral. To trade on margin, investors need to have a margin account with a brokerage firm while the stockbrokers can fix the interest rate on such loans. Allowing margin lending by stockbrokers is one of the recommendations made by a Finance Ministry panel to address problems in the stock market.  

Stakeholders said that margin lending might not fully help the stock exchange market until the liquidity problem in the banking sector is addressed. They asked authorities to fix a ceiling on the interest rate that stockbrokers can charge on margin loans.

After Nepal Rastra Bank permitted stockbrokers to set the interest rate on their own, the Securities Board asked the Nepal Stock Exchange to implement the provision which is in the process of signing an agreement with stockbrokers. “We will be calling stockbrokers interested in issuing margin loans to their clients shortly,” said Murahari Parajuli, spokesperson for the Nepal Stock Exchange.

As per the margin trading provision, brokerage firms have to notify the Nepal Stock Exchange about issuing loans to their clients. The Securities Board has asked the Nepal Stock Exchange to act as an oversight agency to effectively monitor the operations of brokerage firms.

As per the Securities Board’s directive issued last year, stockbrokers with a net asset of Rs50 million can offer margin trading service to investors. Stockbrokers can issue margin loans amounting up to 50 percent of the value of the shares based on the 180-day average price or the prevailing market price, whichever is lower. A potential investor has to deposit up to 50 percent of the value of the stock to be purchased while the rest of the money is put up by the stockbroker

Most of the 50 stockbrokers in the country are eligible to provide margin loans, according to the Stockbrokers’ Association of Nepal. Bharat Ranabhat, president of the association, said they planned to give margin loans using their own funds or loans they plan to take from banks.

With the central bank giving brokerage firms the freedom to set the interest, investors feel that the rate may be on the higher side. “As stockbrokers may charge a higher rate of interest on margin loans than banks, potential investors may go to banks as they are doing now,” said Nepal Stock Exchange officials.

Many stockbrokers are providing loans to their clients by getting an overdraft from commercial banks. “As banks are encountering a shortage of loanable funds, they might not provide enough money to stockbrokers for them to issue margin loans,” said Rajan Lamsal, general secretary of the Nepal Investors’ Forum.