Margin loans should be short term. Investors should make an exit from investments made with borrowed cash quickly even if there is a loss. Otherwise, losses may mount along with repayment burden, dragging both investors and lenders into an abyss recovery from which seems impossible.
Managing Director of IDLC Securities Md. Saifuddin shared its strategy regarding margin loans in an interview with The FE.
At present, the yearly interest rate against margin loans is 15-17 per cent. The return of the equity market is lower than the interest rate. Hence, securing profits from investments to pay back loans is a challenge that intensifies as the repayment period is extended.
Market return was lower than interest rate even when it was in single digit. Pushing back loan repayment and recovery time is what drove the escalation of the market's negative equity to Tk 97 billion as of November last year.
IDLC Securities has avoided the burden of negative equity by assessing risk, quality of stocks and financial strength of customers before disbursing loans.
Even after doing so, when balances of margin accounts fell threatening the recovery of loans, the broker redesigned portfolios and executed forced sales in compliance with the margin rules.
Md. Saifuddin said IDLC Securities and its clients are not facing negative equity because of its cautious strategy in disbursing margin loans.
It had an aggregate amount of margin loans of Tk 1 billion a year ago, which has been halved.
Mr Saifuddin said margin accounts handled by the broker witnessed erosion due to the persistent fall of the stock market.
"We counsel our clients and execute sales in margin accounts to rebalance the accounts. Now, they are in a better position compared to borrowers of other organisations.
"Margin loan is not a product for investment. It's a product to facilitate trading, which can be available for a month."
Negative equity was one of the reasons behind the 1930s global great depression. The world has learnt lessons from that.
Bangladesh's market, however, has been languishing in the grip of negative equity due to malpractices of stakeholders.
There is no scope of negative equity if relevant rules are followed.
The latest extended deadline for provisioning against negative equity and unrealised losses is January 31. Meanwhile, stockbrokers urged the securities regulator to extend the timeframe for provisioning to 2030.
The securities regulator has set a ratio of 1:0.8 for margin loans, meaning a stock broker can disburse maximum Tk 80 in loan against Tk 100 investment in a stock.
"Without assessing risks, many lenders disbursed margin loans aggressively. They ultimately put their organisation at risk," said the managing director of IDLC Securities.
Scope of influencing stock price
Clients are not allowed to inject borrowed money into a stock other than scrips selected by IDLC Securities based on its research.
Short-term loans can be misused to influence a specific stock price. That is why IDLC Securities refrains from providing loans when a large number of its clients intend to inject money into a particular stock.
"We don't want to facilitate any influence on stock price movement," Mr Saifuddin said, adding that margin rules should be amended addressing different matters, such as loan duration.
"Shareholders are the owners of equities but depositors are owners of the company's balance sheets," said the chief of IDLC Securities, emphasizing transparency and accountability.
The board of the company ensures autonomy of the management. "It holds a 360 degree discussion on the final proposals placed by managements."
This framework of accountability makes sure the benefits of the company, its shareholders and depositors, the MD said.
Evading losses
"The ultimate target is to create values for customers because no company can make profits without creating values," Saifuddin said.
IDLC Securities designs its investment portfolio through extensive research on possible risks and returns of stocks. Predictions on the money market and equity market are also taken into consideration.
The company also has sector-wise and stock-wise limits for investments in its own portfolios.
Referring to global market trends, Mr Saifuddin said that around 67 per cent traders make a profit when market performs well, while 97 per cent traders incur losses when market is bearish.
"We performed better in the context of the overall index return whereas many of our clients endured losses in investments that they made at their discretion," said the head of IDLC Securities.
Why are many others in peril?
There is no scope of negative equity if lenders follow the margin rules.
Most market operators have no risk management policy in disbursing margin loans. They disburse loans against any kind of marginable stocks.
Moreover, they find their hands tied when it comes to executing forced sales in line with the rules if they have disbursed loans to their directors or their family members or relatives.
"At one stage, they blame the regulator when they find the burden of negative equity unbearable."
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