Kathmandu, January 26:

Investment in stock market has witnessed an unprecedented growth thanks to ‘margin lending’, a short-term lending scheme from financial institutions for investment in shares. Banks, finance companies and cooperatives all are giving out collateral-free loans with a minimum balance of five per cent of the total amount required for investing in the security market, especially for initial public offerings (IPOs).

Such a lending has created an irresistible demand for shares that recent IPOs have reflected in the overwhelming response from investors.

Recent IPOs from Sanima Development Bank Ltd (SDBL) and Gurkha Development Bank Ltd GDBL), both of which generated the largest response so far, is a testament that margin lending has created a huge demand from investors.

Of these two IPOs, GDBL’s shares have been oversubscribed by more than 108 times, worth Rs 10.38 billion against a demand for Rs 96 million, whereas the SDBL’s shares were oversubscribed by more than 40 times.

“An all of a sudden increment in investment in the share market is mainly due to margin lending. It has attracted both the active and potential investors to stock trading,” says Rewat Bahadur Karki, general manager at Nepal Stock Exchange Ltd (NEPSE).

He says that banks and finance companies have increased their lending in stocks, as margin lending has been found to be a lucrative avenue for investment.

Karki says that the ban in ‘cross holding’ between two companies has also resulted in a rise in margin lending, which has impacted both primary and secondary markets. “Cross holding to a certain extent should be allowed to self-regulate the market,” he adds.

Although Nepal Rastra Bank, the regulatory authority, allows margin lending, it has not fixed a cap on investment. Banks and the finance companies are free to make investment in shares under this scheme, says Upendra Poudel, chief executive officer at Nepal Merchant Banking and Finance Ltd (NMBFL).

He suggests for a certain regulatory framework, which sets the extent of investment that could be made. “It will also help balance demand and supply,” Poudel says.

NMBFL is an issue and sales manager for most of the recent IPOs. Industry insiders say that only 20 per cent applicants in GDBL’s IPO have invested their own money, whereas the majority of them have gone through margin lending from various banks and finance companies.

Apart from regulating margin lending, some measures including form collection and filling-up procedures should also be improved to encourage genuine investors, says Karki at NEPSE.

On one hand, margin lending has facilitated investors who can now invest in shares with a small amount in hand.

On the other, it has become a lucrative business for many banks, finance companies and cooperatives, as they charge interests of seven to twelve per cent along with processing and service charges of 0.25 to one per cent of the total amount.

Nava Raj Pokharel, president of Nepal Brokers Association says margin lending has brought about a new whim in stock investment.

He, however, suggests that investors should not jump at it without calculating the trend and knowing the basics of a company.