KATHMANDU: The amount of loans floated against shares by commercial banks has shrunk by 10 per cent as the falling share prices has discouraged investors from borrowing at high interest rates.
The loans have contracted by 9.8 per cent to Rs 4.6 billion in the first 10 months of the current fiscal year. By mid-May 2012, loans floated against shares have declined by Rs 507 million from the beginning of the current fiscal year when the loans floated by commercial banks against collateral of stock certificates amounted to Rs 5.2 billion.
Since the beginning of the fiscal year, Nepali share prices have been heading south and the benchmark index slumped by more than 15 per cent by the ninth month.
The falling stock prices discouraged investors from borrowing at interest rates as high as 15 per cent by pledging shares whose prices are falling.
"There is constant pressure from financial institutions to maintain a margin due to the depreciating share prices and if one fails to maintain a margin, banks do not hesitate to auction the shares," said general secretary of Nepal Stock Investors' Association Prakash Rajaure. Since mid-April, the index that bounced over 300 points was able to pull itself up due to the positive political development.
Despite the recent political turmoil, the index is above 350 points but investors are yet to start borrowing to purchase shares. Loans against shares make up for less than one per cent of the total lending of commercial banks.
However, investors are hopeful that the scenario will soon change with the new provisions regarding share purchase loan that allows investors to borrow by furnishing proof of transaction on brokers' guarantee even during blank transfer.
"A lot of investors are waiting for the current mechanism for loans against shares to come into operation, so that they can start borrowing and reinvesting into shares," said Rajaure.
The Finance Ministry had asked Securities Board of Nepal (Sebon) and Nepal Rastra Bank to make provisions for allowing investors to obtain share purchase loans based on brokers' guarantee in early June after signing an agreement with investor associations regarding measures to boost the stock market.
Both the regulators have asked financial institutions and brokers to start lending and to facilitate the proof
of share transactions, respectively.
However, ambiguity regarding brokers' role in
the matter still needs to be clarified by Sebon. "Once the brokers are legally cleared to start the operation, share transaction in the market will definitely go up," added Rajaure.