Central Bank’s new provision brings cheer to investors

  • Moves include allowing banks to issue loan of up to 65 percent on the valuation of shares and considering right shares and bonus shares as collateral
- Rajesh Khanal, Kathmandu
All of this culminated in market gaining 2.55 percent in its index to cross 1,200 points

Dec 27, 2018-

Nepal Stock Exchange (Nepse) surged by 30.26 points to close at 1,216.27 points after investors responded positively to the new measures offered by the central bank on loan against share.

Nepal Rastra Bank revised its unified directive to the bank and financial institutions on Wednesday to now offer leniency on issuance of loan against shares by the banks. In the new provision, the central bank has reduced the risk weight in such loans to 100 percent from 150 percent previously. 

Similarly, it has also asked the banks to provide loan of up to 65 percent on the valuation of shares based on the average price in the past 180 days or the prevailing market price, whichever is lower. Earlier, the threshold of margin lending stood at 50 percent. 

In addition, banks can now issue loan on shares at a maximum of 40 percent of their core capital. Earlier, the NRB had restricted banks to issue loan in shares up to 25 percent of the core capital.

Likewise, the banks were asked to adopt soft policy while making margin call to their debtors who took loans by keeping shares as collateral. The banks now have to consider right shares and bonus shares that are yet to be listed at the Nepse as collateral while calculating the valuation of shares to make the margin call. Through the monetary policy, NRB has allowed the banks to make margin call only if the shares valuation fall below 20 percent of the approved value while issuing loan. 

The central bank has come up with the new provision following the report forwarded by the Finance Ministry’s panel, which was formed to study the interest rate war and its impact on the money and capital markets. The ministry took this initiative, citing the free fall in the country’s only stock market that had plunged to around 1,100 points from over 1,800 points in the past two years. The panel had forwarded 58 points of suggestions to the government to address the ongoing problem. 

All of this culminated in market gaining 2.55 percent in its index to cross 1,200 points. As a result, the indices of almost all the trading groups went up, with transaction amount totalling Rs696.53 million. In addition, the central bank has allowed the banks to open subsidiary companies to work as stockbrokers. The subsidiary, however, cannot do transactions of the stocks issued by its parent company.  

Along with adopting the soft policy in loan on shares, the central bank has also asked the banks to maintain the spread rate at 4.5 percent by mid July. “The banks will face actions if they are found charging spread rate at more than 5 percent after the given deadline,” NRB has stated in its circular. 

Stocks investors hailed the central bank’s initiative, stating that it has tried to accommodate most of the demands from investors. Chhote Lal Rauniyar, vice-president of the Nepal Investors’ Forum said the new measures could encourage investors to go for long term investment rather than just investing on a temporary basis. “Provided the provisions are implemented effectively, it could also help develop the stock exchange market as a separate industry in future,” Rauniyar said.

Published: 27-12-2018 06:53

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