The illusion of margin lending as a financial panacea

Nepal Rastra Bank (NRB) has recently adjusted margin lending rules, a move that has benefited the Nepal Stock Exchange (NEPSE) index, which saw a rally following the changes. The new directives allow banks and financial institutions (BFIs) to potentially increase the loan-to-value ratio from 70 percent to 80 percent for companies deemed fundamentally sound. This assessment is based on factors like paid-up capital, profitability, credit rating, and regulatory compliance.

This relaxation of rules is not an isolated event but rather a continuation of a policy trend. In recent years, the NRB has gradually loosened its stance on margin lending. Previous measures included increasing the loanable amount from 65 percent to 70 percent, adjusting individual borrowing limits, and lowering the risk weight for such loans. These changes have collectively made it easier for investors to leverage their shareholdings.

Share-backed loans have seen substantial growth, with outstanding amounts reaching Rs162.9 billion as of mid-June, an increase of nearly 16 percent in the first 11 months of the last fiscal year. Despite this growth, these loans constitute about 2.7 percent of the total loan portfolio of BFIs, indicating they are not yet a dominant factor in the overall financial system. The NEPSE, with a market capitalization of Rs4,634 billion against Nepal's nominal GDP of Rs6,600 billion, has grown significantly since its inception in 1994.