August 22: On July 23, the Nepal Rastra Bank (NRB) unveiled the monetary policy for the fiscal year 2023/2024. Subsequently, following the introduction of this policy, the Nepal Stock Exchange (NEPSE) Index has experienced a decline over 14 trading days and ascent over trading seven days. Over this timeframe, the NEPSE Index has plummeted from 2227 points to 1998 points, marking a significant loss of 229 points.
Investors were hopeful that the NRB would ease its regulations concerning the stock market, which had been experiencing a bearish trend for the past two years.
They expected that the central bank would decrease the risk weightage for loans against shares from 150 percent to 100 percent. Additionally, they anticipated the removal of the Rs 120 million cap imposed on share loans backed by securities.
Contrary to these expectations, the Nepal Rastra Bank decided not to alter its policies regarding both the risk weightage for share-backed loans and the Rs 120 million limit on margin loans.
This decision disappointed investors. Longtime share investor Surendra Adhikari attributes the downturn in the stock market to the NRB and its Governor Maha Prasad Adhikari.
Adhikari accused the Governor of aligning with the main opposition party, CPN-UML, and implementing stringent monetary policies to steer the economy. Moreover, he believes that the Governor holds a negative perspective on Nepal's stock market and its development.
According to Adhikari, the stock market's recovery depends on substantial investments from major investors. The existing Rs 120 million loan limit for securities has created challenges for big investors seeking to borrow money from banks to inject fresh cash into the market.
Experienced investor and market analyst Prem Kumar Oli noted that despite the liquidity in the banking system, banks were hesitant to provide credit to investors. He explained that established investors refrained from borrowing money due to the reluctance of banks and financial institutions to disburse credit promptly.
Oli, however, predicted that, despite the ongoing decline, the NEPSE Index would not experience a more severe drop. He advised individuals with surplus funds in the bank to consider purchasing shares at this time.
Interest rates and the stock market have an inverse relationship. When interest rates rise, share prices fall. Bonds become more attractive. Investors were hopeful that banks would slash their interest rates for the period from mid-August to mid-September (Bhadra).
Contrary to their expectations, majority of the banks increased their rates for the period. They have offered interest rates up to 10.896% on individual fixed deposits for the period from mid-August to mid-September (Bhadra). With the rates increase on deposits, interest rates on loans are expected to go up during this same period. Rate hikes may have prompted investors and traders to exit the market.
The banking system currently has a liquidity of over Rs 350 billion. Finance Minister Dr. Prakash Sharan Mahat has approved including the local-level budget of approximately 100 billion as deposits. However, even with this liquidity in the market, investors are showing reluctance to take loans. What could be the reason behind this?
According to a broker, "The present market is experiencing a downturn, and there's uncertainty about when it will rebound. This uncertainty is making investors hesitant about obtaining loans for long-term investments using borrowed money."
In the stock market, the gains achieved in three months are sometimes equivalent to those obtained in three years. Consequently, many are cautious about investing in the declining market using borrowed funds due to the potential for incurring losses. Adding to this, the Central Bank has imposed a loan limit of 120 million for individuals seeking loans against shares. Notably, large investors have already hit this threshold.
As the market continues to decline, both small investors and traders find their capital trapped in the market. Brokers point out that they are unable to infuse fresh capital into the stock market.
According to data from the Central Bank, the total loan amount issued against shares experienced a 5% decrease in the fiscal year 2022/2023. Loans exceeding 10 million have seen a 4% reduction, loans ranging from 2.5 to 5 million have dropped by 16%, and loans below 2.5 million have decreased by 14%. Conversely, loans within the 5 to 10 million range have shown an increase of 11%.
Likewise, besides the stock market, various other financial activities have also significantly contracted, contributing to a shortage of new funds in the market. Investors and brokers share the perspective that the bearish trend in the share market will persist unless regulatory bodies, such as the government and the central bank, shift their policies towards share market.
