Margin lending, which has emerged as a popular lending instrument for financial institutions in recent years, is the loan extended to a shareholder against share certificate as the collateral. Though lending financial institutions have set their own mechanism to extend loans against public shares, generally 60 percent of the market value of the shares is issued in loans.
In a directive issued to all banks and financial institutions last week, NRB has asked them to do a careful evaluation of share prices at the end of each week and demand margin from the borrowers within the next 21 days if the margin set by the banks is less than the weekly average market price of the shares.
However, if borrowers refuse to pay the margin then the lending banks are required to sell the shares pledged as collateral through Nepal Stock Exchange and recover the loans, the directive says. Likewise, lending financial institutions are required to arrange a 100 percent loan loss provision if they fail to recover loans extended against shares as collateral.
Similarly, the central bank has also barred financial institutions from renewing, restructuring and rescheduling the loans extended against personal and institutional guarantee along with shares presented as additional surety. However, the NRB directive has allowed the financial institutions to renew, restructure and reschedule loans extended to construct or buy land and houses, and commercial and industrial loans by pledging the fixed assets as primary securities along with shares presented as additional surety.
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