Brokers, merchant banks have until 1 January to adjust margin loans

The capital market regulator has allowed stockbrokers and merchant banks another six months to adjust their margin loan rates to 12%, given market conditions.

Now these entities will have until 1 January 2022 to comply with the provision, said the Bangladesh Securities and Exchange Commission (BSEC) in a directive on Tuesday.  

The securities regulator said it would not enforce compliance on stockbrokers and merchant banks immediately.

The loans that investors take from brokerage houses and merchant banks to invest in the stock market are known as margin loans.

On 13 January 2021, the commission set 12% as the maximum interest rate on margin loans. It was supposed to be adjusted by February this year.

But the BSEC later extended the tenure until 30 June 2021 upon request of top stockbrokers and merchant banks, given the present circumstances prevailing in the capital markets.

As per the decision, stockbrokers and merchant banks that work as portfolio managers would be able to charge borrowing customers, no more than a 3% spread above the cost of funds.

Nevertheless, margin loan interest rates will be capped at 12%.

Previously, there was no fixed interest rate on margin loans. Stockbrokers and merchant banks would charge interest as they wished, as high as 14-18%.

Consequently, investors were dissatisfied. Recently, a group of investors demanded that the interest rate be reduced.

Besides their own funds, brokerage houses and merchant banks provide margin loans to stock market investors by taking out loans from various banks and financial institutions.

As per the rules for margin loans, at present, investors qualify for a margin loan amounting to a maximum of 50% of their investment.