NASA Securities (Broker No 58) began offering margin loans to investors for stock investments on October 20, 2022. With approval from Nepal Rastra Bank (NRB) and authorization from the Nepal Stock Exchange (NEPSE), NASA was permitted to facilitate margin transactions. At the time, NASA reported that they had extended margin trading services to nine investors, with a total of Rs 9 million disbursed within the first month. However, NASA has since suspended the service. In an interview with New Business Age , Madan Paudyal, Managing Director of NASA Securities, explained that they were unable to offer margin trading to new investors due to a lack of financial resources. "We don't have enough support from banks and financial institutions, and we can't offer this service to many investors relying only on our own capital," he said.

What is Margin Trading?

Margin trading allows investors to borrow additional funds (the margin) from a broker, beyond their own capital, in order to invest in the stock market. Investors must repay the loan with interest and fees. According to NRB, 34 stock brokers were approved for margin transactions in the last fiscal year, and NEPSE confirmed that 27 brokers received the necessary permits to conduct these transactions.

While NRB has encouraged margin trading as part of its strategy to gradually open up lending avenues for brokers, the concept has not taken off as expected. Despite more than two dozen brokers being licensed to conduct margin trading, NASA Securities remains the only one to have actually launched the service. Other brokers cite a lack of resources and the absence of a legal framework for loan recovery as barriers to offering margin trading.

"There's no legal protection for loan recovery. The current provisions are procedural; the risk can only be mitigated with a proper legal framework," said Dharmaraj Sapkota, Chairman of the Brokers’ Association. "Moreover, brokers cannot meet market demand if they are restricted to lending solely based on their own capital."

A few months ago, NEPSE recorded over Rs 30 billion in transactions on a single day, even without margin trading facilities. Brokers believe that turnover could rise significantly if margin trading were available. "Brokers need resources to meet market demand," Sapkota explained, suggesting that brokers should be allowed to access low-cost wholesale loans from banks and financial institutions to offer margin trading.

Current Lending Practices and Challenges

At present, banks and financial institutions provide loans primarily through microfinance institutions to underserved individuals, with a mandate that 5 percent of total loan investments go to low-income clients. Microfinance institutions receive wholesale loans from banks at lower rates and then lend to their target customers at slightly higher rates. Brokers are seeking a similar arrangement to access wholesale loans. However, Nepal Rastra Bank has indicated that wholesale loans for brokers cannot be offered at this time. "We support margin transactions based on international best practices," an NRB executive director commented.

Brokers licensed by the Securities Board of Nepal (SEBON) are requesting a legal framework to protect the investments of banks and financial institutions that might provide wholesale loans to them. The NRB executive director suggested that with proper legal safeguards, brokers could gain access to such loans.

What is Broker Margin Trading?

Margin trading is a facility that allows investors to purchase shares using funds beyond their own capital. The brokerage firm provides the additional funds (the margin) and the investor is required to pay interest and other fees for this service. To use margin trading, an investor must visit the broker's office, complete a Know Your Customer (KYC) form, and then sign a margin trading agreement after 15 days. A separate account for margin trading is then established.

Eligibility for Margin Loans

Under the Margin Trading Facility Procedure, 2075, brokerage firms must have net assets of at least Rs 50 million to offer margin facilities. Eligible companies must also meet other criteria, including having at least 10,000 shareholders, net assets exceeding paid-up capital, and having paid at least 10 percent dividends over the past two years. Additionally, companies must have traded shares on at least 80 percent of trading days in the previous fiscal year and held an annual general meeting within the first six months of the fiscal year.