The stock market regulator has decided to extend lending facilities to investors to buy stocks when the index is at an all-time high despite criticism from analysts against lending-based investments on the stock market.
Investors can now borrow up to 80% of their investment in the stock market if the benchmark crosses 7,000 points and stays below 8,000.
Previously, investors were allowed to take out a loan of Tk 80 against an investment of Tk 100 if the benchmark remained below 7,000 points.
For the periods when the index exceeded 7000 points, the borrowing capacity was lowered to 50 Tk against 100 Tk of investments.
The Bangladesh Securities and Exchange Commission (BSEC) has increased the limit and issued a directive that holders of stock exchange trading rights certificates are allowed to extend their credit facilities to approved clients on the basis of a ratio of 1. : 0.80.
“In view of the Covid-19 pandemic situation, and in the interest of investors, the directive has been amended,” said the BSEC.
“In general, I do not advise investing in the stock market by taking out loans. Moreover, if someone has liquidity, only a third should be invested in the stock market,” said Mirza Azizul Islam, former adviser to a interim government. .
The remaining third is expected to be invested in fixed income tools and real estate or gold, he said.
Regarding the extension of the margin lending facility, Islam, a former president of BSEC, said that many stocks are still undervalued and the overall price-earnings ratio is not that high either. , so the extension was correct.
However, the regulator should watch whether the market will see another bubble like the one in 2010. If there is a possibility, it could be further reduced, he added.
A senior official at a brokerage firm, preferring to remain anonymous, said the high amount of margin loans provided by merchant banks to buy stocks was a major reason for the 2010 stock market bubble.
So the BSEC’s decision was not a wise one, he said.
Many investment banks are still suffering from the loss of margin loans as stock prices have plunged and the government discouraged lenders from selling stocks in a bear market, he said.
Such a decision by the BSEC will ultimately encourage the purchase of shares with loans, which is not a good sign for the market, he added.
The BSEC’s decision could run counter to a central bank decision, said Professor Mohammed Helal Uddin, director (research) of the Integrated Rural Development Center for Asia and the Pacific (Cirdap).
The Bangladesh Bank sent a letter last week to banks scheduled to submit their investment book daily.
This was nothing new, but the BB letter was only aimed at raising awareness, he said, adding that the central bank and the stock market regulator should maintain good cooperation.
Overall, the equity market was not overvalued, so there was no concern about being granted a higher credit facility, Uddin said.
A market bubble has been observed in the insurance sector, but many other sectors are still in a low position, he said.
However, political decisions must be supported by factual reasons and based on analysis, so that they should not change suddenly, said Uddin, a professor in the economics department at Dhaka University.
The decision to extend the margin loan came when the DSEX hit 6,699 points last Thursday, which is its highest level ever since its inception in 2013.
Investors panicked that they would have to sell stocks to adjust margin lending if the index crosses 7,000 points. The BSEC therefore assured them with the directive that they did not need to sell shares.
The BSEC is expected to clarify whether investors should adjust their stocks by selling stocks if the index crosses the threshold or if they will not get further loans at the previous rate once the index crosses the threshold. -he adds.
He also said that lenders always wanted to provide margin loans because they were quite liquid and easy to provide as the loan was backed by liquid stocks. But investors are at huge risk if the stocks they’ve bought face a drop in price, he said.
Md Moniruzzaman, Managing Director of IDLC Investments, said margin lending was a double-edged sword.
If someone can use it in a proper way, it can increase yields. Otherwise, someone can be completely devastated, he said.
So new entrants to the market should avoid loans, he added.