8 Key Conditions for Margin Lending Issued by Nepal Rastra Bank; Extends Credit to Eligible Institutions
The Nepal Rastra Bank has set forth eight conditions for margin lending using share collateral. As per the unified guidelines issued to banks and financial institutions by the Nepal Rastra Bank, margin lending can be done using shares listed in the market. The margin for such loans is subject to eight conditions.
The margin lending amount for a specific share will be based on the last 180 days' average market price and the Last Traded Price (LTP), whichever is lower will be evaluated. Up to 70% of this valuation can be provided as a margin loan.
Once margin lending is initiated for such a loan, the limit for additional margin or further margin extension cannot be established based on the re-evaluation of the share held as collateral. The duration of such loans will not exceed one year.
Borrowers who have been using margin loans against shares in lending will be able to renew such loans after paying the full interest on the loan taken. However, this provision will not apply to bonus shares and rights shares obtained by the borrower.
If the share collateral's value drops due to market price changes, the concerned bank or financial institution should inform the borrowers and further evaluate the value of the shares. Similarly, the rights and bonus shares that are to be obtained on the mentioned shares during a margin call can also be included in the count of pledged shares, even if those shares are not listed. The maximum duration for such loans will not exceed one year.
Borrowers can renew such loans after paying the full interest on the loan taken as long as they have been regularly servicing the loan taken. However, for other purposes, the provision for additional shares in the form will not be applicable, as informed by the Nepal Rastra Bank.
The related banks/financial institutions must update the necessary information, data, and details related to the loan file in the margin lending process. Such shares taken as additional security will only remain as an extra deposit in the margin.
Banks and financial institutions that have not maintained the required capital adequacy ratio as declared by the Nepal Rastra Bank or in accordance with the directives, entities that have become net loss-making, and institutions removed from listing by the Nepal Stock Exchange, and those whose financial year has ended within one year are not eligible to engage in margin lending.
Institutions that have sustained losses for three consecutive years, entities that have been operational for less than a year, organizations that have not convened an annual general meeting for three years, and entities whose trading days have not reached a minimum of 250 days cannot utilize share collateral for margin lending.
Regarding margin lending using shares listed in the margin trade, the banks and financial institutions must have clear provisions in their loan policy/directives that establish a well-defined process for providing other loans after securing shares, adhering to the margin lending guidelines.
In the said loan policy/directive, there must also be explicit mention of the analysis of fundamental indicators such as the price-earnings ratio, price-to-book value, dividend yield, dividend payout ratio, and other fundamental indicators for shares taken as collateral.
Banks and financial institutions can provide up to 40% of their primary capital in margin lending. However, in the case of exceeding the limit, they must reduce the amount from their primary capital.
Businesses involved in margin trading must comply with prevailing legal regulations and follow the policies/directives of the Nepal Depository Board as recommended by the Nepal Stock Exchange, as per Section 76 of the Nepal Rastra Bank Act 2058.
The Nepal Rastra Bank will provide approval based on the guideline in effect in the Nepal Rastra Bank Act 2058 Section 76 for such businesses in line with NEPSE's recommendation.
