Margin loans boomerang: Brokers

Stock brokers of the Dhaka bourse suggest bringing changes in margin loan disbursement rules to avoid forced selling, which, according to them, is mostly responsible for market plunge time and again.
Representatives of the DSE Brokers Association, Bangladesh (DBA) made the recommendation at a meeting with the securities regulator on Wednesday.
While discussing the present market situation, stock brokers blamed the steep decline that the market had witnessed for the last four sessions on forced selling executed in margin accounts with negative equity.
After losing 32 points, the DSE broad index (DSEX) went down 6000-point mark on March 13. In a continuation of correction, the index lost another 160 points in the following three sessions amid thin investor participation.
DBA representatives said the aggressive disbursement of margin loans had translated into the market's downward spiral as lenders executed forced selling to save their own funds.
They said it was time to reconsider the process of disbursing margin loans and upgrade it.
Elaborating on the changes needed, DBA President Saiful Islam said the price-to-earnings (P/E) ratio should not be the sole indicator to decide disbursement of margin loans for stock investment.
"Margin loans should be distributed based on an analysis of the fundamentals of the listed securities," he said.
Presently, investors are allowed to avail of margin loan facility against 'A' and 'B' category companies with P/E ratio up to 40. The number of existing marginable securities is 186.
To gain profit from investments of borrowed money in stocks, good companies ensuring high returns must be sorted out from the marginable stocks.
The Bangladesh Securities and Exchange Commission (BSEC) had many times emphasised the importance of margin loans to enhance liquidity flow in the market.
The loan ratio was enhanced many times, tagging it with the broad index, meaning the ratio was higher for the index at a lower level.
Presently, lenders are allowed to disburse margin loans at a ratio of 1:1, meaning investors can receive a loan worth Tk 100 against their deposit of Tk 100.
Though the market saw a boost to the liquidity flow every time borrowed cash was injected, it faced the risk of crashing down as forced selling happened to recuperate the money lent.
Many companies with weak fundamentals qualified for margin loans. They have recently been transferred to junk category.
Investors, who once injected funds into such companies, encouraged by the facility of margin loans and abnormal price hikes, are suffering due to massive corrections.
At the Wednesday's meeting, the stock brokers said the market was now experiencing the immediate impact of withdrawal of the floor price.
There had been no real activities in the market for 20 months due to the price restriction. During the period, the blue chips and fundamentally strong stocks saw insignificant turnover and price movement.
In the meantime, investors increased investments in junk stocks.
After the withdrawal of the floor price, junk stock started to see massive price correction because investors started coming back to blue chips and other good-performing stocks, said meeting participants.
Now, investors are rearranging their portfolios with goods stocks, they said.
"It's a good sign for long-term stability of the market," said the DBA president.
The positive impact of the appreciation of the taka against the dollar and the recent growth in remittance and export volumes will help the market overcome the gloomy scenario.
At the meeting, the DBA representatives have also laid importance on ensuring proper vigilance of the regulators in the market.
Malpractices behind the abnormal price hikes of the listed securities should be contained at the right time.
The BSEC in response assured brokers of taking market supportive measures.

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