KATHMANDU: Margin loans, or share-backed loans, have surged by 26.3% within the last six months, even as credit flow to other sectors remains slow.
According to data from Nepal Rastra Bank (NRB), margin loans increased from NPR 90.09 billion at the end of the last fiscal year (mid-July) to NPR 113.77 billion by mid-January. In the month of January alone, NPR 5.83 billion was disbursed in margin loans, with large investors being the most aggressive borrowers.
Large Investors Lead Margin Loan Growth
By mid-January, margin loans exceeding NPR 100 million had reached NPR 75.44 billion, marking a 34.9% increase in just six months. This figure was only NPR 55.93 billion by mid-July. Large investors now account for 66% of total margin loans.
Similarly, loans ranging between NPR 50 million and NPR 100 million increased by 14.9%, reaching NPR 14.28 billion. Loans between NPR 25 million and NPR 50 million rose to NPR 16.14 billion, registering an 11.9% increase in the past six months.
On the lower end, margin loans below NPR 25 million increased by just 8.1%, totaling NPR 7.90 billion.
Rising Credit Flow Despite High-Risk Weights
Currently, margin loans under NPR 50 million carry a risk weight of 100%, while loans above this threshold have a risk weight of 125%. Despite these high-risk provisions, the disbursement of large-scale margin loans continues to grow significantly.
A major factor driving this surge is the decline in commercial bank interest rates, which have now fallen to around 7-8%. The lower cost of borrowing has encouraged investors to take out loans and inject more funds into the stock market.
Regulatory Limits on Margin Lending
Nepal Rastra Bank has imposed strict limits on margin loans to control excessive leverage in the stock market:
– Individual Borrowing Limit: A single individual can take a maximum of NPR 150 million in margin loans from banks and financial institutions.
– Institutional Limit: A financial institution can allocate up to 40% of its core capital for margin loans.
Margin loans are typically issued for a period of up to one year. Borrowers can renew their loans only if they have fully paid off all outstanding dues, including interest, by the end of the loan term.
Loan Disbursement Based on Share Valuation
Banks and financial institutions determine loan eligibility based on share valuation. The maximum loan amount is capped at 70% of the lower value between:
1. The average price of the pledged shares over the past 180 days
2. The latest market price of the shares
This ensures that lending is backed by conservative share valuations, minimizing excessive risk exposure for banks.