The Nepal Rastra Bank (NRB) has recently eased margin lending rules for banks and financial institutions (BFIs), a move that has drawn mixed reactions amid ongoing concerns about the Nepal Stock Exchange’s (NEPSE) performance under the current administration. The updated guidelines, published on July 15, allow BFIs to extend margin loans up to 80 percent of a stock’s value, up from the previous 70 percent, based on an evaluation of the underlying company’s fundamentals.

Margin lending, which enables investors to borrow funds against the value of their existing securities to buy additional shares, has gradually become more accessible in Nepal over recent years. According to NRB policy changes, BFIs—including 20 commercial banks, 17 development banks, and 17 finance companies—can now assess collateral stocks on factors such as paid-up capital, operational history, profitability, dividend records, credit ratings, regulatory compliance, and timely conduct of general meetings. If a company's shares meet these criteria, loans against them can carry a higher loan-to-value ratio.

This adjustment follows a series of policy relaxations since 2020. The margin loan ceiling has increased incrementally, individual borrowing caps have been raised and eventually removed, and risk weights on such loans have been lowered to ease lending pressures. These changes coincide with efforts to reinvigorate the NEPSE, which experienced a modest rally earlier in the year when the index reached 2,970 points on March 25, shortly before Prime Minister Balendra Shah took office on March 27.

Despite the partial market gains and increased lending flexibility, experts caution about the risks associated with higher leverage. Margin borrowing amplifies gains in rising markets but also magnifies losses during downturns, potentially triggering margin calls that force borrowers to add funds or liquidate holdings. Such forced selling can accelerate market declines, regardless of a company’s financial strength.

Critics also question the approach of linking margin loan limits to a company’s fundamentals rather than focusing primarily on the borrower’s capacity to manage leverage responsibly. They warn that underlying market volatility could lead to widespread forced selling, applying downward pressure even on traditionally stable stocks. There is concern that this mechanism could create a feedback loop of declining prices and mounting liquidations during bear markets.

The overall amount of margin loans outstanding has grown steadily, reaching Rs162.9 billion by mid-June, up nearly 16 percent in the past fiscal year. Although this represents only 2.7 percent of the total loan portfolio of BFIs, the sector is closely monitoring these developments, especially as other lending sectors such as real estate remain stagnant.

NRB’s easing of margin regulations is seen by some as a signal of support to the market, aiming to encourage risk-taking and stimulate economic activity through increased investor participation. However, regulators are urged to balance this goal with prudent oversight of both lenders and borrowers to avoid building systemic vulnerabilities.

As Nepal’s stock market continues to expand, the recent margin lending changes underscore the need for careful risk management. Without adequate safeguards and borrower education, the increased availability of margin loans could expose investors and financial institutions to greater volatility and potential losses in future market corrections.