NRB move to curb market volatility

The Nepal Rastra Bank (NRB) today suspended margin lending on shares and loan renewal, apparently to curb speculative investment.
The directive, to be enforced from tomorrow, directs category A, B, and C financial institutions — commercial banks, development banks and finance companies respectively — to stop margin lending and renewal of loans against shares.
“The actual impact will be on the capital market but it will also hit those financial institutions whose portfolio of lending against shares is big,” said Radhesh Pant, managing director of the Bank of Kathmandu and president of the Nepal Bankers’ Association.
“The directive is aimed at stopping manipulation and insulating the stock market,” said National Planning Commission member Dr Posh Raj Pandey.
“If the market is not corrected, more stringent measures will be used.”
Chiranjivi Nepal, chairman of the Securities Board of Nepal, also agreed: “The directive is for market correction. The capital market is said to be fuelled by margin lending on shares that the banks provide subscribers against their shares.”
Since the financial institutions are more vulnerable due to margin lending, this directive could save them from a crisis and stabilise the capital market, Nepal said. “Nepse needs to be cut down to size. If the share market crashes after reaching a sky high, not only will the investors find themselves on the streets but it will also hit the financial institutions and the national economy ,” he said.
“The directive may bring some correction,” said stockbroker Rabindra Pradhan. The capital market, dominated by financial institutions, has recently posted a whopping growth and margin lending is attributed to Nepse’s 'abnormal rise'.
But some challenge this directive. “NRB cannot issue any such directive as it is against the Company Act,” said capital market analyst Rabindra Bhattarai. “Banks can lend on collateral, be it shares or anything.”
NRB’s Legal Department Director Dharmaraj Sapkota dismissed Bhattarai’s argument.“The Nepal Rastra Bank Act-2058, clause 79, gives the central bank special power to issue such directives in order to manage the monetary market," he said.