Margin loans surge amid low interest rates

With an abundance of investable capital in the banking system and loan interest rates dropping to single digits, investors’ interest in margin-based loans, where shares are used as collateral, has surged. While entrepreneurs in other sectors remain hesitant to take loans, capital market investors are actively borrowing for transactions, as recent data reveals.

According to Nepal Rastra Bank, margin-based loans against shares increased by 32.78 percent by the end of the current fiscal year (2024/25) compared to the same period last year. As of the first four months of the current fiscal year, the flow of such loans reached Rs 107.76bn, up from Rs 81.16bn in the same period last year.

Despite having an estimated Rs 500bn to Rs 700bn in the banking system, the central bank has expressed concerns about monetary management. Bankers report limited demand for new loans. Ganeshraj Pokharel, CEO of Citizens International Bank, attributes this to reduced confidence among entrepreneurs. “Although we are allowed to lend up to 90 percent of the credit-deposit (CD) ratio, we are currently at 83 percent. Even with seven percent additional lending capacity, loans are not being issued. Many entrepreneurs seem to be in a ‘wait and watch’ mode,” he said.

Pokharel noted that sluggish real estate transactions and minimal economic activity have contributed to the lower demand for loans. However, he expressed optimism about gradual improvements, emphasizing the need for more lending to stimulate economic growth.

Meanwhile, margin-based loans from the 20 commercial banks, which hold over 90 percent of the market share, have increased by 35.08 percent this fiscal year. These banks disbursed Rs 8.59bn in margin loans, up from Rs 6.36bn during the same period last year. Similarly, the 18 development banks operating in the country recorded a 25.07 percent rise in margin loans, with lending growing to Rs 1.76bn from Rs 1.4bn last year. Additionally, 18 finance companies saw a 22.02 percent annual growth, disbursing Rs 4.23bn in the first four months of this fiscal year compared to Rs 3.47bn in the previous year.

The central bank’s 2022 amendment to its integrated directive raised the limit on margin loans against shares. Individuals can now borrow up to Rs 150m, while institutional investors can borrow up to Rs 200m. Previously, there was no cap for institutional investors.

Earlier, the central bank had imposed limits on margin loans, categorizing the capital market as an unproductive sector. However, following criticism from investors, the limits were relaxed, allowing borrowers to access up to Rs 120m from multiple licensed institutions.