Kathmandu. KATHMANDU: Nepal Rastra Bank (NRB), the central bank of Nepal, has introduced a new and flexible provision in the issue of margin lending as per the provisions of the Monetary Policy for the current fiscal year. Issuing a directive, the central bank has made it mandatory for the banks and financial institutions to determine the limit of share mortgage loans on the basis of the strength of the respective company.
Nepal Rastra Bank (NRB) has set various criteria for evaluating the strength of an institution. According to the new directive, the size of the paid-up capital, minimum period of listing of securities, position of the company in profit and the history of dividend distribution should be the main basis while measuring the strength of a listed company.
In addition to this, the credit rating of the company, compliance with the regulatory system and whether or not it has held the AGM regularly should be made the basis of the evaluation.
The loan-value ratio of the loans provided against the collateral of the shares of companies that score high marks in such valuation i.e. those companies that are found to be financially sound will be further relaxed. In the case of such companies, the loan limit can be increased up to a maximum of 10 percent points above the existing limit. This will make it easier for the shareholders of companies with good financial statements and good governance to get more loans.
The NRB has also given special instructions to the banks and financial institutions to make this process transparent and systematic. Banks will now have to mandatorily publish the valuation method and product paper to be adopted while issuing share mortgage loans on their official websites. This will give investors a clear idea of the basis on which the loan limit has been fixed.
As per the current provision, the loan is based on the average of the closing price of the last 180 working days published by the Nepal Stock Exchange (NEPSE) or the prevailing market price, whichever is less.
As per the provision, the loan can be issued only up to 70 percent of the value of the shares. The new system has provided flexibility of up to 10 percent in case of strong companies within the 70 percent limit.
This new move of the Rastra Bank is expected to encourage companies that have maintained good governance in the stock market and are financially strong. In addition, it is believed that it will make share mortgage loans more secure and institutionalize the system of pricing loans based on risk.
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