The Bangladesh Securities and Exchange Commission (BSEC) considers retreating from its January 2021 notification that announced to cap the interest rate against margin loans at 12%.
"Since the situation has changed a lot in a year, the regulator is now thinking about leaving the rate to the market," BSEC Commissioner Dr Shaikh Shamsuddin Ahmed told The Business Standard.
"We are hopeful that the supply factors would drag the margin loans' interest rate down."
In the last year, the market has got a large number of new brokerage firms who will need to come up with competitive offers for a position in the brokerage industry. Besides, the BSEC is encouraging a robust financing environment for the capital market intermediary industries.
"The two factors together should work," he added.
The BSEC, allowing a maximum 3% spread over the margin lender broker-merchant banks' cost of funds, had capped the margin loans' interest rate at 12%, keeping in mind the 9% cap in banks' lending rate.
But a large number of broker-merchant banks can borrow only from non-bank financial institutions where the 9% cap is not applicable.
Bangladesh Merchant Bankers Association in a letter to the BSEC said earlier that the 12% cap would drastically limit their ability to provide fresh loans to the investors. Also, the cap might force them to take back the existing margin loans as the actual cost of the funds was much higher than the imposed ceiling due to the negative equity burdens.
Consequently, the market might face sell pressure if they had to call back existing margin loans, the association said.
The BSEC extended the deadline to implement the cap up to the end of 2021, instead of repealing it.
Stock investors take margin loans to buy additional shares for maximising gains.
However, it is not a pleasant experience for majority investors as a decline in stock price exponentially drags margin loan takers' equity down.
The pains of margin loans are also very high for the average investors as the brokerage industry charges 15-20% or even more interest against the leverage fund they lend to clients.