Why cheap loans for investments are not cheap enough

Both investors and market intermediaries do not see margin loans as an investment opportunity even after the securities regulator relaxed rules for injecting borrowed money into stocks.
That is not because of the market being bearish for long.
Rather, the price movement restriction is what comes in the way of investors' taking loans for fresh investments.
It has confined most marginable stocks to the floor, promising hardly any return that would make loans worthy to take.
This is the backdrop to a stark fall in the disbursement of margin loans in recent times.
"At present, the demand for margin loans is almost zero," said Mohammed Rahmat Pasha, managing director of UCB Stock Brokerage.
The professional lender disburses margin loans against fundamentally strong companies, such as Square Pharmaceuticals and Renata.
Square Pharma has been languishing at Tk 209.8 since November 29 last year and Renata at Tk 1,217.9 for almost the same length of time.
Margin loans are preferable to both investors and lenders for short-term investments.
While market intermediaries - merchant banks and brokerage firms - give out loans to their clients by borrowing from their parent companies or financial institutions at around 9 per cent annual interest rate, the clients pay them back at the rate of 12-13 per cent.
Hence, annualised return on investments on marginable securities must be above 12-13 per cent.
According to market insiders, investment returns must be above 18 per cent with inflation taken into account.
Therefore, holding shares purchased with margin loans for a long period of time increases the cost of investments.
While making short-term decisions, investors and lenders look at the possibility of both dividend yields and capital gains. Therefore, margin loans are taken ahead of the dividend disbursement of the stock chosen or to take advantage of the stock's momentum on the bourses or both, said a market analyst wishing not to be named.
However, the present market is highly illiquid, meaning the assets are not easily converted into cash.
Lenders prefer securities having liquidity. Otherwise, funds will get stuck with the client's illiquid assets, the major issue that makes investors to decide against margin loans too.
All equity-based securities with price-to-earnings ratios at 40 or below are deemed marginable. A newly-listed security is a choice for margin loans after 30 trading sessions from its debut trading.
Credit facility is not applicable for 'Z' category securities, but it comes under the facility seven days after being elevated from the junk stock status.
As many as 174 stocks meet the requirements mentioned above, according to the Dhaka Stock Exchange (DSE).
Recently, the securities regulator extended the criteria to allow margin loans for investments in all 'A' category stocks even with P/E ratio between 40 and 50. The minimum paid-up capital is Tk 300 million in that case.
A total of six companies have fallen under the extended coverage.
Now the number of total marginable securities is 180 but most of those, Square Pharma and Renata for example, have remained stuck at the floor.
So, the scope of margin loans aimed at improving liquidity flow in the market is seen as unworthy.
"Lenders are very much calculative when it comes to disbursing loans," said a top executive of IDLC Securities.
They have been cautious especially after the 2009-10 stock market debacle. Brokerage firms and merchant banks were caught off guard after giving out margin loans imprudently before the market collapse. Many of them are yet to recover the money lent back then.
Lenders now have their own guidelines to follow. "But they maintain operations within the regulatory framework," said Md. Saifuddin, managing director of the IDLC Securities.
Loans are provided considering the risks involved.
Lenders fix the amount of money to be used for margin loans in a particular year depending on the market situation. They also consider clients' performance for the last one or two years and stocks' potential, among others.
The relationship between lenders and borrowers also plays a role in margin loan disbursement.
Loan is not given unless a marginable security, as decided by the securities regulator, is on the lender's own list of marginable stocks.
Lenders prepare their lists based on their own risk assessment.
A number of brokerage firms and merchant banks earlier received funds for margin loans at a lower interest rate from the stock market revitalisation fund created by the government.
The Capital Market Stabilisation Fund (CMSF) has been working to ensure that funds are available for margin loans for market intermediaries at around 8 per cent.
But the cheaper fund too is not lucrative as investments do not secure good enough profits to bear the cost.
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