KATHMANDU, Jan 31: The tightening of margin lending by banks and financial institutions (BFIs) and rapid rise in interest rates in recent days has sent a jitters among investors, causing a panic sell off in the stock market.
Such rush to sell off stocks by the investors who have been getting margin calls from the BFIs has sent the Nepal Stock Exchange (Nepse) benchmark index down by whopping 65.44 points, or 4.76 percent, on Monday to close at 1,309.7 points.
According to observers, investors wary of liquidity problem faced by the BFIs who have been intensifying their margin calls to borrowers who had taken loans upon stock pledges to buy shares during the stock market boom. Brokers say that there has been massive selling pressure in the market.
“It was a gradual fall of stocks until today when there was a steep, unexpected and sudden decline in share prices. Most of the investors panicked by various negative factors affecting the market seemed to be in rush to offload their shares,” said Anjan Raj Poudyal, former president of Stock Brokers Association of Nepal (SBAN).
Though Nepse is on a downward path since climbing a record high of 1,881.45 points on July 27 last year, the correction of the stock market was gradual and often followed by recovery. However, the end of excess liquidity in the banking industry which had largely driven the stock market boom is now reversing the trend, say analysts.
“It’s primarily the liquidity problem that has driven down the market. Since our market is yet to mature and largely dominated by retail investors, they tend to overreact in any development,” says Deepesh Vaidya, the managing director at Kriti Capital and Investments Ltd.
Banks’ tightening of the finance to stock market also comes in the wake of regulatory concern over their lending on stocks. In a recent periodic report, the NRB has said that ‘credit excesses in risky areas could divert bank credit from productive sectors. “Therefore, banks and financial institutions are required to exhibit prudent and cautious lending behavior,” the report added.
BFIs’ margin type loans have jumped to Rs 38.34 billion in mid-December of the current fiscal year, 2016/17, from Rs 26.75 billion during the corresponding period of the last fiscal year.
Investors say that many investors are compelled to offload their shares even at lower prices as they are overwhelmed with margin calls from BFIs which also caused panic among many other investors. “There have been margin calls from banks due to downfall in stock prices as well as credit crunch in the banking system. Many other investors are rushing to sell their shares because they believe they would lose their value of shares if they do not sell it now,” said Dipendra Agrawal, an executive member of Nepal Investors’ Forum. He also urged the government to intervene in the market to save many investors from losing their wealth due to stocks decline.
Another reason exacerbating the stock market fall was a recent statement by Beema Samiti Chairman Chiranjibi Chapagain who is said to have indicated that there would not be a mention of paid-up capital in the new insurance act. “Many investors have been betting on insurance stocks as there was expectation that there would be massive rise in the paid-up capital through new insurance act. However, the statement by the new chairman has dashed their hopes,” said broker Poudyal.
However, Chapagain defended his statement with Republica saying that the paid-up capital is not mentioned in the act which is a subject to be introduced by the regulatory body through a directive.