Merchant bankers have urged the securities regulator to defer the implementation of its directive regarding cap on margin loan interest till June 30, 2022.
They said the market may face sell pressures if the directive is not deferred until the low cost fund becomes available and the negative equity burden of the stock market intermediaries is resolved.
Bangladesh Merchant Bankers Association (BMBA) made the plea for deferring the interest cap in a letter sent to the Bangladesh Securities and Exchange Commission (BSEC) on Wednesday.
In a directive issued on January 14, 2021 the securities regulator fixed the highest interest rate at 12 per cent on margin loan disbursed against listed securities.
The directive, which was supposed to come into effect from February 1 last, said the highest spread on the cost of margin loans will be 3.0 per cent.
To avail 3.0 per cent spread against the interest cap set at 12 per cent, the cost of funds of the merchant bankers must be 9.0 per cent.
Following the BSEC's directive, the BMBA said the market has been in downtrend for the last 2 months and the BSEC's directives have negatively impacted the market.
Asked, the BMBA president Md. Sayadur Rahman said the merchant bankers are not able to get funds at 9.0 per cent interest.
"After receiving funds at around 13 per cent, the merchant bankers disburse margin loans at 15-16 per cent. So, it's difficult to comply with the BSEC's directive until low cost fund is ensured," Mr. Rahman said.
In its letter sent to the BSEC, the merchant bankers said due to the huge negative equity and accumulating interest, the capital market intermediaries are already over-burdened.
"The merchant bankers are not getting any interest from the negative equity codes but they have to service full interest to banks and non-banking financial institutes (NBFIs) in regular intervals," the BMBA said.
The negative equity of the market intermediaries have also crossed Tk 130 billion, the BMBA said.
According to the BMBA letter, the 12 per cent cap will drastically limit their ability to provide fresh margin loan to clients and it may compel them to call back existing margin loans as actual cost of fund of the market intermediaries is much higher than the cap due to the negative equity burdens.
"The market can face sell pressure if they call back existing margin loans."
The BMBA said many capital market intermediaries may not survive if the 12 per cent cap is imposed without fully resolving the negative equity issue.
"Most of the banks are not interested to lend money to the capital market intermediaries at 9 per cent interest rate considering the inherent risk in capital market investment and higher provisioning requirement."
"Additionally, considering the risk premium, NBFIs are also charging 12 per cent or more interest rate per annum for giving loans to capital market intermediaries."
Explaining their situation, the merchant bankers have urged the securities regulator to defer the implementation of its directive on interest cap at least till June 30, 2022 to pave the way of arranging low cost fund for the market intermediaries.