BSEC spurs loans despite criticism

The stock market regulator has decided to extend loan facilities for investors to buy stocks when the index is at its historical highest level despite analysts' criticism against loan-based investment in the stock market.

Investors can now take loans of up to 80 per cent of their investment in the stock market if the benchmark index crosses 7,000 points and stays within 8,000.

Earlier, investors were allowed to take a loan of Tk 80 against investment of Tk 100 if the benchmark index remained lower than 7,000 points.

For times when the index went over 7,000 points, the loan taking capacity was lowered to Tk 50 against every Tk 100 of investments.

The Bangladesh Securities and Exchange Commission (BSEC) increased the limit and issued a directive saying the Trading Right Entitlement Certificate holders of exchanges are allowed to extend their credit facilities to approved clients on the basis of a 1:0.80 ratio.

"Considering the Covid-19 pandemic situation, and for the interest of the investors the directive was amended," said the BSEC.

"In general, I don't advise to invest in the equity market by taking loan. Moreover, if anyone has liquid assets, only one-third should be invested in stock market," said Mirza Azizul Islam, former adviser to a caretaker government.

The rest one-third should be invested in fixed income tools and real estate or gold, he said.

About the margin loan facility extension, Islam, a former BSEC chairman, said many stocks were still underpriced and overall price-earnings ratio was also not that high, so the extension was okay.

However, the regulator should monitor whether the market is going to see another bubble like that of 2010. If there is any possibility, it could be reduced further, he added.

A top official of a stock brokerage firm, preferring anonymity, said the high amount of margin loan provided by merchant banks to buy stocks was a big reason for the market bubble of 2010.

So, the BSEC's decision was not wise, he said.

Still many merchant banks are suffering from the loss of margin loans as stock prices nosedived and the government discouraged lenders to sell shares amid a bearish market, he said.

Such a decision by the BSEC will ultimately encourage the purchase of stocks with loans, which is not a good sign for the market, he added.

The BSEC's decision may be a counter to a central bank decision, said Prof Mohammed Helal Uddin, director (research) of the Centre on Integrated Rural Development for Asia and the Pacific (Cirdap).

Bangladesh Bank sent a letter last week to scheduled banks to submit their investment ledger daily.

It was not new but the BB's letter was just for creating awareness among people, he said, adding that the central bank and stock market regulator should maintain good cooperation.

Overall, the share market was not overvalued so there was no concern on allowing higher credit facility, Uddin said.

Stock price bubble was seen in the insurance sector but many other sectors are still at a low position, he clarified.

However, policy decisions should be backed by factual and analysis-based reason, so it should not change suddenly, said Uddin, who is a professor of the economics department of the University of Dhaka.

The decision of margin loan extension came when the DSEX reached 6,699 points last Thursday, which is its historical highest level since its inception in 2013.

Investors were panicked thinking they will need to sell shares to adjust margin loans if the index cross 7,000 points, so the BSEC gave them assurance with the directive that they do not need to sell shares.

The BSEC should give a clarification on whether investors need to adjust shares by selling shares if the index crosses the threshold or whether they will not get further loans at the previous rate after the index crosses the threshold, he added.

He also said lenders always want to give margin loans because it was quite liquid and easy to provide as the loan was backed by liquid shares. But investors face huge risks if shares they bought face a price drop, he said.

Md Moniruzzaman, managing director of IDLC Investments, said margin loans were a double-edged sword.

If someone can use it appropriately, he/she can increase returns. Otherwise, someone can get wiped out entirely, he said.

So, new entrants in the market should avoid loans, he added.