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Home Bangladesh

Why affordable loans for investments fall short of expectations

Bangladesh’s foreign currency reserves fall below $30 billion for the second time in May
by Insider Desk
May 28, 2023

Investors and market intermediaries are not interested in margin loans despite relaxed rules by the securities regulator.

The issue is not the bearish market but rather the restrictions on price movement that prevent investors from taking loans for new investments. This has recently led to a significant decline in the disbursement of margin loans.

Margin loans are typically preferred for short-term investments, but the current market conditions have made them unattractive.

The cost of holding shares purchased with margin loans for a long period increases, and the illiquidity of the present market makes lenders hesitant to provide margin loans. Lenders prefer liquidity to avoid getting stuck with illiquid assets.

The criteria for marginable securities include price-to-earnings ratios of 40 or below, and newly-listed securities become eligible for margin loans after 30 trading sessions.

The securities regulator recently expanded the criteria to include all ‘A’ category stocks with a P/E ratio between 40 and 50, resulting in 180 marginal securities. However, many securities, such as Square Pharmaceuticals and Renata, remain stuck on the floor.

Lenders have become more cautious after the 2009-10 stock market crash and now follow their own guidelines. They consider market conditions, client performance, and the potential of stocks before providing margin loans.

The relationship between lenders and borrowers also plays a role in loan disbursement, and lenders create their lists of marginal stocks based on their risk assessments.

There are funds available for margin loans from the Capital Market Stabilisation Fund at a lower interest rate, so the lack of profitable investments makes them unappealing.

Overall, the current market conditions and restrictions have made margin loans unattractive to both investors and lenders.

Tags: FeaturedLoan
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