BFIs see rise in hire-purchase, margin loans

- POST REPORT, Kathmandu
BFIs see rise in hire-purchase, margin loans

Dec 6, 2014-

With the banking system flush with excess liquidity, banks and financial institutions (BFIs) have increased lending to stock investors and hire purchase purposes.

Banks’ margin-type loans rose to Rs 20 billion as of mid-October this year, up from Rs 12.73 billion during the same period a year ago, according to Nepal Rastra Bank (NRB). The growth in margin lending this year is significant as the loans in the period between Mid-October 2012 and Mid-October 2013 had risen by just Rs 2 billion.

Newly-elected president of Nepal Bankers’ Association Upendra Poudel said investors received more loans, with rising share prices. “Amid excess liquidity in the banking system and limited investment areas, the share market has been an alternative investment area for banks,” he said.

The banking system has an excess liquidity of Rs 34 billion as of this week, according to NRB.

Poudel said the banks have also started investing in shares of hydropower and other companies instead of treasury bills that offer just around 0.1 percent interest. However, since August, as the market started to fall, the growth in margin lending has been sluggish.

After reaching a six-year high of  1083.55 points on July 21, the stock market has been posting losses. It ended this week at modest 850.16 points. BFIs’ margin lending started to increase along with the rise in the stock market since the Constituent Assembly election. The excess liquidity situation and reduced interest rate also played a key role. The interest rate on share purchase loans has also come down to as low as 8 percent. Although the monetary policy talks about putting in place provisions to discourage lending against share collateral, the central bank has not adopted such provisions considering a possible negative effect of unexpected market volatility on financial stability.

To prevent the speculative investment, NRB in August directed BFIs to limit their investment to 1 percent of core capital in held-for-trading securities. Held-for-trading securities are shares or bonds bought with the sole purpose of selling them at a profit in a short period.

NRB, however, states there has not been any change to the provision that allows BFIs to invest up to 10 percent of their core capital in shares, debentures or mutual funds of listed companies and 30 percent of their core capital in listed companies.

The central bank has allowed the BFIs to lend to share investors even against electronic share certificates. “Whatever provisions the central bank has put in place earlier, no change has been made to control BFIs’ lending to share investors,” said NRB Spokesperson Manmohan Kumar Shrestha. Over the review period, the BFIs also saw their hire purchase loans rise. With the banks lowering interest rates on the loans to as low as eight percent, the lending to the auto sector rose to Rs 66.54 billion as of mid-October this year, according to NRB. The figure was at Rs 55.55 billion a year ago.

Poudel said hire purchase loans issued to individuals are more secure compared to those lent to purchase public vehicles.

Published: 07-12-2014 09:28

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