Merchant bankers request removal of additional provisioning

In the rising stock market, the demand for margin loans borrowed by investors from their brokers to buy listed securities in addition to their equity, is increasing.

At the same time, capital market intermediaries – stockbrokers, stock dealers, and merchant banks – are facing a scarcity of funds to lend to their clients. 

Banks' reluctance to lend to capital market entities is the major reason behind the ongoing fund crisis, said Md Sayadur Rahman, president of Bangladesh Merchant Bankers Association (BMBA). 

His association has recently written to the Bangladesh Bank so that the central bank reduces the discouraging provision requirements of 2% to 1% against any loans banks provide to capital market entities. 

Banks have to set aside an amount from their profits as provisions against the default risks of their loan portfolio, which is generally 1% of the lent sum, but it goes up to 2% if the borrower is a capital market entity, Sayadur Rahman told The Business Standard.

"With the double provisioning requirement, bankers are discouraged from giving market entities any loans, and those who agree are forced to charge us higher interest," he added. 

The association leader said stockbrokers and merchant banks have to pay the highest rate of interest to lenders – a maximum 9% to the commercial banks and around 12% to non-bank financial institutions (NBFI). 

After paying the high rate, brokers and merchant banks charge margin loan clients up to 17% interest, which is highly criticised by investors, and the Bangladesh Securities and Exchange Commission (BSEC) has already ordered the market intermediaries to bring it below 12% at the beginning of 2022. 

The central bank's requirement of high provisions has immensely reduced the market intermediaries' capacity to support the market, BMBA said in its letter to the Bangladesh Bank. 

Margin loans are considered to be riskier than industrial and commercial loans as listed securities are the only collateral there, the value of which is volatile in nature and often do not help lenders to recover their assets during market falls in Bangladesh. 

The crisis tends to further intensify as the government and the regulator discourage, virtually prohibit, forced recovery of margin loans which adds to the selloff in the secondary stock market.  

Margin loan takers agree to allow their brokers to sell off their stocks if the value of the total investment portfolio gets below the amount of margin loans and the investors fail to deposit more funds to pop up their equity value. 

A lack of the worldwide practice of forced selling during the 2010-11 market crash resulted in a serious crisis of bad margin loans which ultimately neither benefited the market, nor the investors and of course not the margin loan providers. 

Negative equity in investors' accounts had kept the market paralysed until it bounced back in the middle of 2020. 

However, most of the top brokers, nowadays, are more conservative to disburse margin loans and are analysing clients' return performance before lending generously. 

"Margin loan is the apple of discord between brokers and their clients as the clients want more loans but brokers and merchant banks have their fund limitations," said Hassan Jabed Chowdhury, chief executive officer (CEO) of United Financial Trading Company Ltd, a top-tier brokerage firm of the Dhaka Stock Exchange (DSE). 

The CEO of another top brokerage firm has recently told The Business Standard, "We are losing some big clients because we are not giving them margin loans as much as they expect. We need loans from banks."

Another leading brokerage firm is planning to give margin loans to only affluent clients who have additional wealth beyond the stock market portfolio. 

"As we are not sure that we can sell off clients' stocks when our asset is at risk during market downturns, we will ensure that the margin clients can inject fresh funds to avert forced selling and keep our fund safe," its CEO said, seeking anonymity. 

In Bangladesh, both giving and recovering margin loans is subject to regulatory discrepancies as BSEC sets how much margin loans a broker can give to their clients against which kind of stocks, while the recovery falters due to restrictions on forced selling during market downturns. 

Currently, a broker can provide margin loans up to 80% of client equity, which is set to come down to 50% if DSEX, the broad-based benchmark of DSE, goes above the 8,000 mark.