Margin loans, once considered an attractive investment opportunity, are now facing a decline in demand among investors and market intermediaries in Bangladesh. The restrictive price movement and lackluster performance of marginable stocks have deterred investors from taking loans for fresh investments. The disbursement of margin loans has significantly decreased in recent times, with the demand reaching almost zero.
Price Movement Restrictions and Returns on Investment
The limited price movement of marginable stocks has made it challenging for investors to attain significant returns that would justify taking loans. With most marginable stocks languishing at the floor, the potential returns fail to meet the necessary threshold for loans to be considered worthwhile. The annualized return on investments in marginable securities must be above 12-13%, considering inflation and market expectations.
Role of Market Intermediaries and Risk Assessment
Market intermediaries, including merchant banks and brokerage firms, play a crucial role in providing margin loans to clients. However, they have become cautious due to past experiences, such as the stock market collapse in 2009-10, which resulted in significant losses for lenders. Presently, lenders carefully evaluate the risks involved in disbursing loans, considering factors such as clients’ performance, stock potential, and the liquidity of securities.
Impact of Credit Facility and Securities Categorization
Credit facilities are essential for margin loans, enabling investors to borrow funds for investing in securities. However, certain categories of securities, particularly the ‘Z’ category, are not eligible for credit facility, making them less attractive to investors. The recent extension of criteria allowing margin loans for ‘A’ category stocks with a P/E ratio between 40 and 50 has expanded the scope of eligible securities, but the overall liquidity and performance of marginable securities remain low.
Challenges for Market Liquidity and Stabilization Efforts
The illiquid nature of the present market poses challenges for lenders, who prefer securities with higher liquidity. Without liquidity, funds may get stuck with clients’ illiquid assets, hindering the recovery of loans. Efforts to stabilize the market, such as the Capital Market Stabilization Fund (CMSF), aim to provide cheaper funds for margin loans. However, the profitability of investments in the current market conditions fails to justify the costs involved.
The decline in demand for margin loans in Bangladesh reflects the cautious approach of investors and lenders due to market conditions, restricted price movements, and liquidity concerns. While margin loans were once considered a viable option for short-term investments, the lack of attractive returns and potential risks have led to a significant decrease in their disbursement.
Frequently Asked Questions
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What is the role of credit facility in margin loans?
The credit facility refers to the arrangement that allows investors to borrow funds from financial institutions or brokerage firms to invest in securities. In the context of margin loans, credit facility plays a crucial role as it determines the availability and terms of borrowing for investors looking to leverage their investments. It helps investors increase their purchasing power by providing them with the necessary funds to buy securities on margin, i.e., using borrowed money. -
What are ‘Z’ category securities in the stock market?
‘Z’ category securities in the stock market typically represent stocks of companies that are considered to be of lower quality or facing financial distress. These stocks are often associated with higher levels of risk and lower trading volumes. They may have certain limitations or restrictions, such as being ineligible for credit facilities or margin loans. ‘Z’ category securities are closely monitored by regulatory bodies to ensure investor protection and market stability. -
What is the role of the Dhaka Stock Exchange (DSE) in the securities market?
The Dhaka Stock Exchange (DSE) is the main securities exchange in Bangladesh, where the trading of stocks and other securities takes place. It serves as a platform for companies to list their shares and for investors to buy and sell those shares. The DSE provides the necessary infrastructure, systems, and regulations to facilitate fair and transparent trading activities. It plays a vital role in promoting capital market development, attracting investments, and contributing to the overall economy of Bangladesh. -
What are the risks and guidelines associated with margin loans?
Margin loans involve certain risks for both investors and lenders. Investors face the risk of potential losses if the value of the securities purchased using borrowed funds declines. They also need to consider interest costs and potential margin calls if the value of their securities falls below a certain threshold. Lenders face the risk of non-repayment if the investor defaults on the loan. To mitigate these risks, lenders have their own guidelines and risk assessment processes in place. They consider factors such as the financial stability of the borrower, the quality of the marginable securities, and the market conditions before approving margin loans. -
What is the Capital Market Stabilization Fund (CMSF) and its purpose?
