Thursday, December 27, 2018

Central bank tweaks regulations to aid stock market

Closely following the recommendations of a committee formed to study the slide in stock market and to reinvigorate it, the central bank tweaked rules and regulations yesterday. 


Issuance of loan against shares by the banks:  Reduced the risk weight in such loans to 100% from 150%. Offer loan up to 65% of the valuation of shares based on the average price in the past 180 days or the prevailing market price, whichever is lower. Earlier, the threshold of margin lending stood at 50%.  They can also issue loan on shares equivalent to at most 40% of their core capital. Earlier, the NRB had restricted banks to issue loan in shares up to 25% of the core capital.

Margin call:  Banks will now consider right and bonus shares as collateral while valuating shares to make the margin call. Earlier, they were allowed to make a margin call if valuation of shares fell below 20% of the approved value while issuing loan. 

>>These measures will help to increase flow of funds to the stock market, which was crippled by lack of funds as BFIs started to jack up deposit rates. 

Interest spread rate: Banks will have to maintain spread rate at 4.5% by mid-July 2019. Spread rate is the different between deposit and lending rates. They need to reduce spread rate to 4.75% by mid-April 2019. Earlier, it was 5%. 

>>This will help to reduce lending rates. High interest spread is an indication of lack of efficiency and competitiveness of BFIs. High interest spread has its root in a number of factors: risky investment, high inflation (although this is not a case now), high operating costs, reliance on interest income for survival amidst cut-throat competition to rope in depositors, diseconomies of scale due to small market size (which necessitates consolidation of BFIs), and poor access to finance. NRB has been monitoring spread since mid-July 2014 and has been instructing BFIs to bring it down. 

Base rate: Base rate is calculated by BFIs by adding the cost of fund, cost of Cash Reserve Ratio, cost of Statutory Liquidity Ratio, operating cost, and return on asset (ROA). Now, BFIS do not have to to add 0.75 percent ROA while calculating their base rate.

>>This will reduce reported profits of BFIs. Ideally, base rate is published to enhance transparency in lending rate and to strengthen monetary transmission mechanism. NRB started to monitor base rate since 2013 in the case of commercial banks, and since 2014 in the case of development banks and finance institutions. BFIs do not lend below their respective base rate.  

Institutional deposit: The ceiling for share of institutional deposits has been increased to 50% from 45%. 

The committee formed by finance minister has recommended ways to revive the stock market so that is is always in the bullish zone. Tweaking banking regulations to increase temporary funds flowing to stock market is hardly the solution that is needed now. NEPSE should be responding to economic fluctuations more than the variation in cash savings of few players/speculators. A strong and stable stock market mobilizes capital for investment.

One of the unfinished financial sector reform agenda is consolidation of BFIs, which will help to enhance capital base, operational efficiency and resilience of BFIs. NRB has imposed a moratorium on new BFIs and has been nudging BFIs go for merger and acquisition. Fewer and larger BFIs should lower operational cost (economies of scale), lower cost of fund, increase capital base, reduce asset-liability mismatch as long-term funds could be attracted, diversify loan portfolio, increase R&D investment, and enhance resilience to internal and external shocks.