Market Perspective: Nepal Investor Forum President Tulsiram Dhakal Has a Positive Outlook on NEPSE's Prospects

The NEPSE Index closed at 2,097.09 on the last trading day of the fiscal year 2079/80 on July 16 (Sunday). This had represented a gain of 12.16 points from the second last day of trading for the financial year 2079-80. Furthermore, it appears that the NEPSE index has experienced some volatility during the fiscal year, as it bounced back 281.95 points from a recent low of 1,815.14 to reach its closing value of 2,097.09. However, despite this recovery, the NEPSE index still went down by 34.44% from its all-time high, which was reached on August 18, 2021.

On the first trading day of the fiscal year 2079-80 (on 2022-07-17) i.e., Shrawan 01, 2079 the market closed at 2011.40 and closed at 2097.09 levels on the last trading day of the FY 2079-80 (on 2023-07-16) i.e., Ashad 31, 2080 after gaining 85.69 points in a matter of one year. During the same period the market capitalization has increased to Rs. 3,082,519.55 millions  on the last trading day of the fiscal year from Rs. 2,872,103.74  millions on the firts day, which amounts to a net gain of Rs. 201,415.81 millions. 

Nepal Investors' Forum President Tulsiram Dhakal:

Tulsiram Dhakal Explains Three Major Reasons Behind the Nepalese Market Decline

According to Tulsiram Dhakal, the decline in the Nepalese market from its all-time high of 3,198.60 on August 18, 2021, can be attributed to the policies adopted by the Nepal Rastra Bank (NRB). He highlighted three major reasons that led to the market's downturn.

1. Adjustment in Margin Lending:

One of the key factors responsible for the market decline was the adjustment made to margin lending. Margin lending is a significant source of investment in the capital market. Previously, professional investors had the opportunity to obtain substantial loans, some even as high as Rs. 2 Arba (2 billion rupees), to invest in the market. However, as per NRB instructions, this loan amount had to be reduced to Rs. 1 Arba (1 billion rupees) within one year.

This sudden reduction in loan availability put immense pressure on investors, particularly those who heavily relied on margin lending for their investment activities. With the loan amount halved within a short time frame, many investors faced financial constraints and were unable to maintain their previous level of investment, leading to instability in the market.

To obtain the necessary loan amount for their investments, some investors had to approach multiple banks since the maximum loan takeout for share investment was restricted to Rs. 12 crores, with each bank providing a loan of only up to Rs. 4 crores. This further complicated the situation for investors and contributed to the market's decline.

2. Adjustment in Risk Weightage:

Another crucial factor affecting the market was the adjustment made to the risk weightage of loans by the NRB. The decision to increase the risk weightage from 100 percent to 150 percent had a direct impact on the cost for banks. Consequently, banks were compelled to offer loans at higher interest rates to compensate for the increased risk, making it less favorable for investors to borrow money for investment purposes.

The adjustment in risk weightage not only raised borrowing costs for investors but also hampered the accessibility of loans at reduced rates, which, according to Dhakal, is essential for the sustainable growth of the market.

As a result of these policy changes and adjustments, the Nepalese market experienced a significant downturn, dropping to as low as 1800 levels.

3. Liquidity crisis in BFIs

Among these reasons was the significant liquidity crisis faced by the Banking and Financial Institutions (BFIs). The liquidity crisis began with a shrinking of bank deposits, which had a domino effect on the overall financial system, leading to a scarcity of funds available for lending.

As bank deposits decreased, BFIs found themselves struggling to meet their liquidity requirements. This situation severely constrained their ability to provide loans to various borrowers, including investors in the capital market. With reduced funds available for lending, the BFIs had to tighten their credit facilities, leading to higher interest rates for loans.

Dhakal explained that before the crisis, investors in the Nepalese capital market could access loans at relatively lower interest rates, typically around 7 to 8 percent. However, due to the liquidity crunch and the increased pressure on banks to maintain sufficient reserves, interest rates on loans surged to as high as 14 to 15 percent. This sudden spike in the cost of borrowing created a significant deterrent for investors who relied on loans for their investment activities.

The higher cost of borrowing rendered many investment opportunities less financially viable, and some investors refrained from seeking loans for market participation altogether. As a result, investor confidence took a hit, leading to reduced investments and lower overall market participation. The decrease in investment activities and the lack of funds circulating within the market contributed to the decline of the Nepalese capital market from its peak levels.

Tulsiram Dhakal is of the belief that the outlook of the Nepali capital market is mostly positive for the ongoing fiscal year. 

He attributed his belief to three reasons:

1. Liquidity improvement in Bank:

The current liquidity scenario has improved significantly, and as a result of improved deposits in the bank, loan disbursement has become available at reduced interest rates. Similarly, as the alternatives to other investments are constricted, the same loans are likely to be channeled into the securities market, resulting in increased investments. 

The significant improvement in liquidity within the banking sector has led to a positive outlook in the securities market. The influx of deposits into the banks has bolstered their financial reserves and lending capacity, allowing them to offer loans at reduced interest rates. This accessibility to credit has encouraged businesses and individuals to seek loans for various purposes, further stimulating economic activities. Additionally, with limited alternatives for profitable investments, banks are now channeling a portion of their loans into the securities market. By transforming these loans into tradable securities, banks have opened up new investment opportunities, attracting investors seeking diversified portfolios and higher returns. As a result, the increased investments in the securities market not only benefit investors but also support economic growth by providing companies with the necessary funds for expansion and innovation. This symbiotic relationship between liquidity improvement in banks and the positive outlook in the securities market creates a promising scenario for sustained growth and prosperity in the financial sector and the broader economy.

2. New Brokerage Licenses even to banks

The Securities Board of Nepal (SEBON) is in the process of awarding new licenses. Seven brokers have already become operational and have begun extending services. 

The operation of new brokers will expand the outreach, accessibility, and scope of the capital market. In a competitive market, these new brokers must adopt strategies to assimilate new customers, which in turn will also channel more investment funds into the market.

Dhakal also said that as opposed to the context of brokerage services to facilitate trading services in the secondary market , which used to be concentrated mostly in the capital, the scenario is slowly changing. In recent times even banks have been facilitated brokerage licenses and as the outreach of bank is even in the rural and desolate places in Nepal, it will definitely increase the outreach of the market, bringing in funds for investments in the market. 

He also referenced Nabil Investment Banking Limited receiving a stock dealer license. As Nabil already has a banking and capital services for financial management, it will be able to manage loans for investors for investment in the securities market all by itself through all of its functional organizational services. 

3. The market is extremely low at this point 

According to Dhakal, currently, the NEPSE index is very low. He explained that the banking shares which were available previously around Rs., 500 are available today at half the price. 

And to add to that when BFIs are in the process of making public their financial reports available with prospects of good dividend payouts.

The market is likely to increase as investment will become more attractive. 

Lastly, Tulsiram Dhakal said that the share/stock market is one of the most advantageous investments. However, the investors have to carefully judge/analyze their investments and choose the companies, considering the sector-wise investment, company-specific investment and dividend history and prospect.  

(This is based on a conversation our correspondent, Aashish Chaudhary had with President of Nepal Investors Forum, Tulsiram Dhakal.)