Opinion | The illusion of margin lending as a financial panacea
Summary
Nepal Rastra Bank has eased margin lending rules focusing on company fundamentals rather than borrower assessment, increasing buying power in the Nepal Stock Exchange but raising concerns about market stability and risk management.
Key Points
- Nepal Rastra Bank has revised margin lending rules allowing banks and financial institutions to lend up to 80% against shares deemed fundamentally sound.
- Margin loans have grown to Rs162.9 billion, making up 2.7% of total loan portfolios of BFIs as of mid-June.
- Margin lending increases buying power but risks amplified losses during market downturns and can trigger forced selling and price drops.
- Criticism exists over using company fundamentals to decide loan-to-value ratios, which may not prevent market instability during downturns.
