D. Karki |26th May, 2021|
Nepal Rastra Bank (NRB) has implemented the provisions put forward through the third review of monetary policy from 10th Jestha, 2078 (Tuesday). This provision has been implemented with the amendment of the Unified Directive. Many investors may be interested to know; what are some of the major changes that have taken place and how they will affect the market.
What are the modified main provisions affecting stock market?
1) Banks and financial institutions are prohibited for buying and selling shares in the stock market for a period of less than one year. They will not be allowed to make short-term investment in the market from any kind of management.
2) Out of the investment made one year of purchase, only up to 1 percent of the initial capital can be sold in one fiscal year. However, this arrangement will not be considered as an obstacle to sell the shares invested earlier (till 2078-02-10) by mid-July 2079 BS.
3) It is not allowed to invest in the shares of class D microfinance institutions except for the purpose of calculating in the deprived sector loans. If such shares have been purchased before (date 2078.02.10), the sale / disinvestment will have to be done by Poush- 2078.
4) The average price of 180 days should be considered as reference for share pledge loan. Earlier, it was possible to calculate the average price for 120 days.
See our previous post:Monetary Policy Q3 Review
Primarily, NRB has banned banks and financial institutions from investing in the stock market to make profit from short-term transactions. The biggest impact of monetary policy is likely to be seen in the stock market. This will help control the stock market in the coming days. Share speculation is also expected to be controlled to some extent.
What effect does this have on the market?
“Banks and financial institutions will no longer invest in the stock market with trading and speculative moves. They are not allowed to invest in shares of other banks and financial institutions including D class microfinance”.
Probable adverse effects:
Earlier, banks and financial institutions were allowed to invest up to 1 percent of their primary capital in the share market for short-term trading purposes. By doing so, a large amount of money had flowed into the share market. At present, commercial banks alone has a capital of Rs. 5 trillion. The removal of the provision that only commercial banks can invest 1 percent of that, i.e. Rs. 5 billion, the stock market is likely to be severely affected.
Most companies in the hydropower, insurance and other sectors have dividend returns of less than 3 percent. No bank or financial institution invests in shares with a cheaper return rate than Treasury bills by taking a one-year risk in the market. The betting income of some institutions is going to stop.
As BFIs are not allowed to invest in the shares of microfinance companies and directed to sell their investment in microfinance by next Poush-2078, the share price of microfinance companies will be severely affected and will also control the detour of banks making profit through microfinance.
Probable positive effects:
This move by NRB could be appreciated as the role of strong market maker in our context where there is a shortage of market makers. BFIs have been making short-term investments so far, which has made the market volatile and now they have to make long-term investments leading towards market stability.
Now onwards, banks and financial institutions will no longer be able to make short term speculative investment and copycat the rhythm of the market. The way a normal investor is doing business is banned. In the recent period, they were seen far ahead. They were busy increasing their profits by investing in the stock market rather than their core business. It is true that to a large extent it has made the market move. Due to the volatile market and unhealthy activities, the interpretation of good and bad stocks in the market was different.
From now, Banks and financial institutions will invest in companies with strong fundamentals in the long run based on dividends as a rule of not being allowed to sell for one year after purchase. No organization can wait for a year by investing in a bad company, earlier that has been bought and sold as soon as it comes to demat. To put it bluntly, in the coming days, blue chips and penny stocks will be distinguished and emerged from all sectors.
NRB Circular: Illusion & Reality in stocks of microfinance
Banks and financial institutions have been instructed to ban the purchase of microfinance shares this time is only in writing & formality. It is fact that the financial institutions have been alerted since last falgun-078 and the shares have already been sold through auction and market.
Today, the number of microfinance shares in the hands of banks and financial institutions is negligible as most of the microfinance shares are held by mutual funds with institutional holdings. Even if BFIs do have some microfinance scripts, naturally, it is certain that the remaining shares will be sold at a higher profit as they have invested to get the highest profit. There is no reason to sell in a hurry as the time has been given for this and even before that, due to the attractive dividend declaration, the highest price increase will take place.
The small pie in market share of microfinance companies does not seem to have much negative impact. The fact is that the current total share capital of all microfinance is very low and negligible compare to the commercial banks. As microfinance is a relatively strong and high return company, the attraction of investors is not going to decrease. Hence, the shareholders of microfinance companies should not be distracted by the directives of the central bank
This arrangement, which has come after the stock market has reached its peak in this year’s bullion, will not lead to huge losses for the banks, but the risk of pushing the stock market in the opposite direction has increased. However, investors don’t have to worry too much about this directive because the size of the market now has become unexpectedly bigger. The market can easily digest such a trivial matter in bull sentiment. The move by the central bank, which is closely monitoring the market, was already expected. For those who invest in the short term, this move may have a negative effect for some time, but for those who invest in the long term, it can be considered very positive.
Trees don’t grow to the heavens and prices do not rise without interruption and temporary reversals.
Panic early sells may come from the investors temporarily before subsidizing the effect shortly.