Default margin loans weigh heavily on stock market

A good number of merchant banks and brokerage firms are yet to come out of the woods due to gross mismatch between the funds they had lent as margin loans and the value of the stocks they have under their possession as collateral.  
The volume of outstanding margin loans advanced by merchant banks and brokerage firms on the stock market has snowballed to Tk 225.29 billion, inclusive of interest.
Market-insiders gave a sorry account of the margin loans up to July this year, sans any note of optimism about a breakthrough.
In many cases, the market value of shares on clients' accounts witnessed erosion ranging from 30 per cent to 50 per cent of respective outstanding margin loans.
Some lenders said the business activities of many institutional investors were yet to return to normal as a substantial amount of money has been stuck-up in unrealised margin loans.
While talking to the FE, some margin-loan providers said they reduced a portion of their respective margin loans by adopting internal policy.  
According to some available information, a brokerage firm witnessed an erosion of above Tk 2.19 billion against its outstanding margin loans of Tk 4.64 million. The erosion witnessed by two other brokerage firms stood  at above Tk 1.68 billion and Tk 1.79 billion as against the margin loan of Tk 4.97 billion and Tk 4.57 billion respectively.
"The erosion witnessed by the margin-loan providers varies, ranging from 30 per cent to 50 per cent. Alongside seeking our board's support, we are giving effort to make the margin accounts active," said the chief executive officer (CEO) of a leading brokerage firm.
According to information gathered from market-insiders, out of Tk 225.29 billion, Tk 97.79 billion was calculated against the margin accounts maintained by 94 brokerage firms on Dhaka Stock Exchange (DSE) as of July 31 this year.
The amount of margin loans provided by 52 brokerage houses involved with Chittagong Stock Exchange (CSE) has stood at around Tk 65 billion, including interest.
On the other hand, the outstanding margin loans disbursed by 28 merchant banks have amounted to around Tk 62.50 billion, inclusive of interest.
"The issue of outstanding margin loans is yet to be addressed. The authorities are not interested to bring the problem in the forefront," said Minhaz Mannan Emon, a broker on the Dhaka Stock Exchange (DSE).
Emon, also a former DSE director, feels something has to be done as institutional investors are reeling from the burden of margin loans.
In this regard, Mohammad Saifur Rahman, an executive director and spokesperson for the securities regulator, said the lenders themselves should find a possible solution.
"We have paved the way to make the negative margin accounts active. The government has also initiated re-financing for small investors," Rahman said.
He suggests that the merchant banks and brokerage firms should try to inject funds from parent companies.
"We can help them if f they come to us for expanding their capital base," he said.  
The amount of margin loans provided by merchant banks and brokerage firms was above Tk 111.05 billion as of January 31, 2012.
Some lenders said the regulatory decision, which was taken after market debacle to restrict the margin call, is mainly responsible for the increase in the amount of margin loans.
"Loan providers were not able to go for margin calls when the loan amount started to increase. Systematic failure could have been reduced if margin calls were allowed," said Md Moniruzzaman, managing director of IDLC Investments.
Mr Moniruzzaman, also the vice-president of Bangladesh Merchant Bankers Association, said business activities of institutional investors had almost squeezed under the deadweight of margin loans.
"The risk-management culture was absent during aggressive lending on the market. The culture has yet to be fully established on our market," he added.    
After the stock-market debacle in 2010, the securities regulator orally asked the margin-loan providers not to go for forced selling with a hope that the market would bounce back.
Among the brokerage firms, AIBL Capital Market Services topped the list of margin-loan providers with an amount of above Tk 9.61 billion, including interest, as of July this year.
On the other hand, AD Holdings provided the lowest amount of margin loans-worth only Tk 0.87 million.
Among other major lenders,  outstanding amount of margin loans provided by PFI Securities is above Tk 7.23 billion, NBL securities above Tk 6.0 billion, LankaBangla Securities above Tk 5.78 billion, Bank Asia Securities above Tk 5.74 billion,  Mercantile Bank Securities above Tk 5.33 billion, Fareast Stocks and Bonds Tk 4.65 billion, NCC Bank Securities and Financial Services above Tk 4.80 billion, Reliance Brokerage Services Tk 4.39 billion, Shahjalal Islami Bank Securities above Tk 3.93 billion, MTB Securities above Tk 3.85 billion, International Leasing Securities above Tk 3.57 billion, IFIC Securities above Tk 3.48 billion, ICB Securities and Trading Company Tk 3.34 billion, DBL Securities above Tk 2.81 billion, Premier Bank Securities above Tk 2.29 billion, City Brokerage above Tk 2.12 billion and EBL Securities above Tk 1.56 billion.      
Some brokerage firms provided margin loans more than four times their capital base. Greater amounts of loans were provided by taking loans on interest from parent companies and other institutions.
Greater part of such amounts of margin loans was provided by merchant banks and brokerage firms before the December (2010)-January (2011) debacle when the market was on a continuous bull run.
At the time margin loans were provided with the ratio ranging from 1:1 to 1:1.5. After the debacle the loan ratio was increased to 1:2 early January 2011. Presently, the margin loan ratio is 1:0.5.
The lenders disbursed loans to clients by borrowing funds with 11 per cent to 12 per cent interest from parent companies. On the other hand, they charge 15 per cent to 18 per cent interest against loans disbursed to clients.
The chief executive officer (CEO) of a leading merchant bank said on condition of anonymity that they were proposing that clients pay only the principal amount of loans.
As of December 31, 2014, the amount of margin loans provided by AB Bank Investment was above Tk 7.1 billion, ICB Capital Management Tk 6.34 billion, Prime Bank Investment Tk 6.01 billion, Trust Bank Investment Tk 4.57 billion, BRAC EPL Investments Tk 4.63 billion and LankaBangla Investment Tk 4.26 billion.
As of December 31, 2012, total amount of margin loans advanced by 26 merchant banks and 27 brokerage firms was Tk 111.05 billion.
Out of the Tk 111.05 billion, Tk 54.11 billion was provided by 26 merchant banks while the remaining Tk 56.94 billion was provided by 27 brokerage firms.
According to information from market-insiders, the amount of margin loans from merchant banks has stood at Tk 62.50 billion up to July this year.
The CEO of a brokerage firm said on condition of anonymity that recovery of margin loans depends on market stability.
"Under the present market situation adjustment of margin loans is not up to the mark. Somehow we are maintaining the loans which were taken from parent companies and other banks and disbursed against clients' portfolios," the CEO said.   
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