The stock market regulator decided to grant loans to investors to buy stocks when the index is at its highest historical level, despite analyst criticism of leveraged stock market investments.
Investors can now borrow up to 80% of their investments in the stock market if the benchmark index crosses 7000 and remains within 8000.
Previously, investors were allowed to take out a loan of 80 Taka versus an investment of 100 Taka if the benchmark index remained below 7000 points.
During the times when the index was above 7000 points, the ability to receive loans was reduced to 50 Tk for every 100 Tk investment.
The Bangladesh Securities and Exchange Commission (BSEC) has increased the limit and issued a directive allowing exchange trade license holders to lend their credit to approved clients based on a 1: 0.80 ratio.
“Taking into account the situation with the Covid-19 pandemic and in the interests of investors, amendments were made to the directive,” the BSEC said.
“In general, I do not recommend investing in the stock market by taking out a loan. Moreover, if someone has liquid assets, only a third should be invested in the stock market, ”said Mirza Azizul Islam, a former adviser to the interim government. …
The remaining third should be invested in fixed income and real estate or gold, he said.
Regarding the extension of the line of credit, Islam, the former BSEC chairman, said that many of the shares were still undervalued and the overall price-earnings ratio was not that high either, so the extension was acceptable.
However, the regulator must watch to see if the market sees another bubble, similar to that of 2010. If possible, it can be further reduced, he added.
A senior stock brokerage official who prefers anonymity said the large amount of margin loans provided by commercial banks to buy shares was a major cause of the 2010 market bubble.
Thus, the BSEC decision was unreasonable, he said.
Many merchant banks continue to suffer from loss of margin loans, he said, as stock prices plummeted and the government dissuaded lenders from selling shares amid a bear market.
Such a decision by the BSEC will ultimately stimulate the purchase of shares through loans, which is not a good sign for the market, he added.
The BSEC decision may conflict with the central bank’s decision, said Professor Mohammed Khelal Uddin, director (research) of the Center for Comprehensive Rural Development in the Asia-Pacific Region (Cirdap).
Bangladesh Bank sent banks a letter last week requiring them to turn in their investment books on a daily basis.
This was nothing new, he said, but the BB letter was only meant to raise awareness among people, adding that the central bank and the stock market regulator should maintain good cooperation.
Overall, the stock market was not overvalued, Uddin said, so there was no concern about a higher line of credit.
He explained that the stock price bubble was in the insurance sector, but many other sectors are still weak.
However, political decisions need to be backed up by factual and analytical reasons, so they should not change suddenly, ”said Uddin, a professor of economics at the University of Dhaka.
The decision to extend the margin loan was made when DSEX hit 6699 points last Thursday, a record high since its inception in 2013.
Investors were in a panic, thinking that they would need to sell the shares in order to adjust the margin lending if the index exceeded 7000 points, so the BSEC assured them in the directive that they did not need to sell the shares.
BSEC should clarify whether investors need to adjust stocks by selling stocks if the index crosses a threshold, or they will not receive further loans at the previous rate after the index crosses the threshold, he added.
He also said that lenders always want to provide margin loans because they were liquid enough and easily disbursed because the loans were backed by liquid stock. But investors face huge risks if the shares they bought fall in value, he said.
Md Moniruzzaman, managing director of IDLC Investments, said margin loans are a double-edged sword.
If someone can use it properly, he / she can increase the impact. According to him, otherwise someone could be completely destroyed.
Therefore, new entrants to the market should avoid borrowing, he added.