Margin loan crisis

Mohammad Lutfar Rahman (Badal) The years 2011 and 2012 saw a lot of promises and assurances from the top brass of the government about injecting fresh funds into the capital market. In this process of prolonged hope and despair, a staggering sum of Tk 150 billion has remained idle, because the investors lost whatever they had. Rather, they now owe this large sum of money to the margin loan lenders with share values losing, in many cases, more than 100 per cent, i.e., negative equities. This made the interest repayment turn from bad to worse. That is why the market has lost its inherent strength and now needs a 'Big Push'. According to recent media reports, the Bangladesh Bank has released the first instalment of the refinancing scheme fund amounting to Tk 3.0 billion out of the Tk 9.0 billion to help the country's capital market. On August 22 last, 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 Tk 9.0 billion for three years to provide special financial assistance to the small investors who had been affected during the period between January 2009 and November 2011. The investors who made investments below Tk 1.0 million (10 lakh) would be eligible for the assistance. The Investment Corporation of Bangladesh (ICB), after getting the first instalment, will distribute it among the affected investors soon. The central bank said the 'stimulus package' wouldn't be used in any other sector. Under the package, the affected investors would receive loans from the merchant banks and brokerage firms at a 9.0 per cent interest rate while banks and firms would get the fund from the ICB at a 7.0 per cent interest rate. The government gives the fund to the ICB at the 5.0 per cent interest rate. But, considering the real scenario, this re-financing scheme will not be fruitful to solve the Herculean problem created by a large amount of margin loans. Since about Tk 150 billion provided by the stock brokers, merchant banks and financial institutions in margin loans remained stuck-up, much to the concern of the lenders, a mere Tk 3.0 billion loan facility against such a big volume of loans is nothing to cure the disease - it is almost like looking for a needle in a haystack. Moreover, the re-financing scheme has deprived about 90 per cent investors of any benefit out of the package, because only 10 per cent investors may get a solace through this mechanism. In testimony to this reality, merchant banks and brokerage firms are yet to apply for the funds disbursed under the capital market re-financing scheme, although a section of investors had earlier criticised the delayed procedure of fund disbursement. The state-run Investment Corporation of Bangladesh (ICB) is now awaiting the applications for the loans in line with the stimulus package. Such a large amount of margin loans was not backed by collaterals due to a significant decline in 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 Dhaka Stock Exchange (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 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 ranging from Tk 300 million to Tk 1.0 billion. The equity of those clients has gone down below 150 per cent of the debit balance. These participants in the market are now in a state of despair. As of January, 2012, the 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 the largest amounts of loans - Tk 6.50 billion, Tk 6.21 billion, Tk 5.38 billion, Tk 5.62 billion and Tk 5.30 billion respectively. In another development, the DSE had suggested restoration of non-discretionary accounts with negative value to discretionary accounts, if the account holders endorse the suggestion. The DSE said the transaction in margin accounts had also been stuck-up because of the Section 3 (5) of the Margin Rule 1999. Section 3 (5) of Margin Rule 1999 says, "The member shall not permit any new transaction in the margin account, unless the resulting equity in the account would be not less than 150 per cent of the debit balance." If the parent companies allow their subsidiary brokerage firms or merchant banks to convert the loans of the parent companies into equities, the subsidiaries could get further loans from their parent companies, since the Bangladesh Bank now allows commercial banks to give loans up to Tk 10 million to a stock dealer. The DSE had also urged the central bank to allow provisioning of negative equity of banks, non-banks, stockbrokers and merchant banks this year as their negative equity is larger than their total equity. History shows plenty of examples of bailout schemes in the international financial arena. The Obama administration in the USA, after the financial meltdown of 2008, pumped in $700 billion under the Troubled Asset Relief Programme (TARP) and another $250 billion for the capital market. On September 04, 1998 alone, the government of Hong Kong put up $ 8.0 billion to boost the market. On September 03 the same year, the Wall Street lost $400 billion in a single day which seriously unnerved the American investors forcing President Bill Clinton to assure the American nation not to worry about and just the following day the market was back on the track again. We know about the financial meltdown of 1997 that swept across South Asia affecting countries like Thailand, Hong Kong, Indonesia etc. But with timely intervention package programmes by the governments the countries soon recovered from the upheaval. It is still remembered how quickly and boldly the government of Taiwan on September 26, 2000 pumped in 500 billion Taiwanese dollars, equivalent to $16 billion, to shore up the capital market which plummeted to an 18-month low. The financial flu that engulfed the South Asian countries in 1997 soon spread out to the other emerging and developed economies like Brazil losing $ 101 billion in the capital market. Japan lost $ 217 billion, Germany $ 155 billion, Russia $ 102 billion and the US$ 1.9 trillion. The governments of the concerned countries soon took bold steps to bail out and revamp the markets. Unfortunately for Bangladesh, this has been prolonged for too long a period to the agony and sufferings of millions of investors which has already taken a heavy toll on the economy. Now, therefore, there is no time to waste. Considering the present scenario, all the stakeholders should put concerted efforts to develop the stock market. Investors should remain cautious about the latest trend that shows that a section of listed companies are witnessing a rally without any basic reasons. A section of investors are buying stocks despite high PE (price-earning ) ratio while the market PE was 15.18 in August on the DSE. On the other hand, prices of some of the companies are still underpriced. Intelligent investors should avail themselves of such opportunities. Before going for buying shares, not only PE should be considered, rather the net asset value (NAV) and track records of sponsor directors should be equally judged by an investor. And it is always a wise decision to invest only 30 per cent fund of idle money owned by an investor in the stock market. Intelligent investors may think of investing in the primary market as there is no chance of loss here and strengthening the primary stock market helps accelerate the country's industrialisation. The writer is chairman of the Nepal-Bangladesh Bank Ltd and former chairman of IFIC Bank Ltd. [email protected]