Borrowers, lenders of margin loans in dire straits

A large number of investors are passing their days in extreme worries as they are burdened with a huge overdue margin loan they had received from stock brokers during 2007-2010.
The commercial banks and brokerage houses had hiked their margin lending business during the unusual stock bull run during 2007-2010. Huge liquidity in the money market, having no available avenue to invest, coupled with low call money rate had encouraged greater flow of fund to stock market in those particular days.
 Now a staggering sum of Tk 140 billion is estimated to have got stuck and become non-performing because the borrowers do not have the capacity to repay. Rather they now owe this large sum to the margin loan lenders with their share value eroded substantially.
"The burden of interest repayment has become too heavy to bear with. That is why the market has lost its inherent strength and now it needs a 'big push'," a market insider said.
Due to no or little recovery, the loan amount is increasing every day. Coupled with erosion in the value of investment, compound interest rate is worsening the accounts' health. Some accounts are so badly affected that even a 100 per cent price increase won't take them to positive territory, stock market insiders told this correspondent.
Stock brokers and merchants banks who lent the money are now in total disarray. Though, there is no official estimate of the magnitude of the damage.
Out of the outstanding loan worth Tk 140 billion, 70-80 per cent has become non-performing loan, according to an unofficial estimate.
The Bangladesh Securities and Exchange Commission (BSEC) relaxed the provisioning requirement first in 2012 and then in 2013. Now all stock brokers and merchant bankers will be required to complete the provisioning by December, 2014.
However, most of the lenders did not keep provision worth a single taka as evidenced in their audited income statements for 2013. Many are allegedly earning fictitious profits out of the bad loans.
So, they are showing rosy pictures of their books of accounts and paying taxes out of fictitious incomes.
 Top margin lenders did not keep a single taka provision. As per BSEC, they must keep provision also against interest suspense account.
"Income booked for NPL (loan to negative equity client) basket and no specific provision was taken for negative equity balance. It's a basic governance issue and here rule of the law is violated. Accounting principles always ask for conservative accounting," said an analyst.
Thus huge tax is being paid out to government on inflated income and the board of directors of the companies and shareholders are receiving wrong representation, market insiders pointed out.
Stock market analysis said, "There would have been serious capital erosion, and many businesses should have been recapitalised had the bad loans been shown in the books of account properly."
"Inappropriate accounting is causing mistrust amongst stakeholders, including investors. The concealment of the true picture amounts to cheating." Regulator concerned and the board/shareholders should take right strategic decisions, they said.
Bangladesh Bank has already released the first instalment of the refinancing scheme fund amounting to Tk 3.0 billion to help the country's capital market.
On August 22 of 2013, a tripartite memorandum of understanding (MoU) among the Bangladesh Bank (BB), the Bangladesh Securities and Exchange Commission (BSEC) and the Investment Corporation of Bangladesh (ICB) was signed.
The government formed the Refinancing Fund with Taka 9.0 billion for three years to provide special financial assistance to the small investors who were affected between January 2009 and November 2011. The investors who made investment below Taka 1.0 million are eligible for the assistance.
The ICB, after getting the first instalment, distributed it among the affected investors.
Under the package, the affected investors received loan from the merchant banks and brokerage firms at 9.0 per cent interest while banks and firms got the fund from ICB at 7.0 per cent interest. The government gives the fund to the ICB at 5.0 per cent interest.
But, considering the real scenario, this re-financing scheme will not be so fruitful to solve the problem of serious nature. Against Tk 140 billion stuck up loan provided by the stock brokers, merchant banks and financial institutions remain stuck up in a mere Tk 3.0 billion loan facility is nothing. Moreover the re-financing scheme has deprived about 90 per cent investors of any benefit out of this package.
Such a large amount of margin loans is not backed by collaterals adequately due to the significant decline in the prices of the listed securities against which the loans were extended. The prices of the listed securities declined so much that only 25 per cent of Tk 150 billion might be recovered through forced-selling.
According to data of the DSE, the stock brokers provided loans worth Tk 70 billion, whereas the merchant banks and financial institutions disbursed the margin loans amounting to Tk 80 billion as of December, 2012.
The lenders, however, reduced the outstanding loans by Tk 10 billion executing the forced-selling by December, 2012.
Approximately two thousand clients received the total margin loans out of which around 30 to 35 clients were provided the loans hovering between the range of Tk 300 million to Tk 1.0 billion. The equity of those clients has gone below 150 per cent of the debit balance. These participants in the market are now in a state of despair.
As of January, 2013, AB Investment Ltd, AIBL Capital Market Services Ltd, NBL Securities Ltd, Prime Bank Investment Ltd and ICB Capital Management Ltd were the top five financial institutions burdened with loans amounting to Tk 6.50 billion, Tk 6.21 billion, Tk 5.38 billion, Tk 5.62 billion and Tk 5.30 billion respectively.
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The writer is Business Editor of the FE. Email: raihanmchowdhury@gmail.com