An employee operates a cash register at the VNDirect Securities Corporation. Credit that banks are using to finance securities companies for margin lending remains at a relatively low level. — Photo tinnhanhchungkhoan.vn

Ministry of Finance’s proposal to increase the quota for credit poured into the securities sector is largely backed by market experts.

The Ministry is studying a proposal to increase credit for securities companies for margin lending by loosen credit quota that banks are allowed to lend securities company, instead of the current regulation, which stipulates the quota doesn’t exceed 5 per cent of the bank’s chartered capital.

According to the State Securities Committee, credit that banks use to finance securities companies for margin lending remains at a relatively low level, standing around VND30.5 trillion (US$1.3 billion), accounting for only about 0.4 per cent of total outstanding loans of the commercial banking system.

If the proposal is approved, securities companies will have more money to lend investors for margin trading.

“Loosening credit quota to more than 5 per cent of the bank’s chartered capital can be considered as a measure to support all industries affected by the COVID-19 pandemic. In my opinion, this proposal is reasonable in the context that the Government has issued many stimulus packages,” said Ngo The Hien, deputy head of analysis at Sai Gon – Ha Noi Securities Company (SHS).

“Capital flows from securities companies utilised for margin lending, including both equity and bank loans, play an important role for investors and the stock market,” he told news site tinnhanhchungkhoan.vn.

“Investors' awareness of margin trading has been enhanced and the risk control system of securities companies has been improved significantly, thus the bad debt ratio arising from securities lending remains at a very low level.”

“If the proposal of the finance ministry is approved, the credit source for the stock market will be increased, thereby creating new sources of money to support investors in both the short and long term,” Hien said.

According to Huynh Anh Tuan, Deputy General Director of Everest Securities Company, the proposal to loosen credit for the securities sector is a good news for the stock market because the demand for loans from securities companies is quite large.

“But as securities is considered a risky sector, many commercial banks are hesitant to lend to them, especially when companies often do not have collateral,” Tuan said.

Reduced margin debt in the first quarter of 2020 was mainly due to market price fluctuations, investors were forced to sell, as well as a sharp decline in market capitalisation, affecting the loan.

However, the market went back up to the present level, the demand for margin increased, causing the demand for capital mobilisation of securities companies increased.

Nguyen Huu Binh, head of analysis at Vietnam Investment Securities Co said commercial banks aren’t allowed to spend more than 5 per cent of its charter capital for margin loans, which is an out-dated regulation and no longer suitable for current practice.

With the increasing size of the stock market, the demand for margin loans is rising, while raising charter capital in the short term is not an easy move for banks.

According to Le Duc Khanh, director of market strategy department at PetroVietnam Securities (PSI), in addition to the raise of credit quota, there should be solutions to boost investor participation in the market.

“For domestic investors, it is necessary to encourage them to open trading thus attracting domestic cash flow,” Khanh said.

“The new Securities Law will take effect early next year with the application of international financial reporting standards, which helps enterprises disclose information in both English and Vietnamese, supporting foreign investors to access information better.”

This can attract more foreign investors to join the stock market, Khanh said.

Declining margin loans

Margin loans have also declined in the first quarter of this year. At securities company in Q1, margin loans were estimated at VND50 trillion, down by 14 per cent year-on-year.

The highest margin loan was reported by Mirae Asset Viet Nam Securities Company with VND7.2 trillion, a decrease of 2.9 per cent year-on-year, followed by SSI Securities Corporation with VND4 trillion, down by 25 per cent against last year.

Margin trading is subjected to a number of restrictions. For example, the total margin loan at a securities company to a single customer must not exceed 3 per cent of the lender’s equity.

As the margin loan has a maximum term of three months, with an additional three-month extension. This often forces investors to sell securities to pay debt when the loan maturity expired.

It can be assumed that securities companies do not lack the resources to lend, but investors are hindered to borrow due to tight regulations.

Credit is currently poured into the securities sector mainly through two channels – the loans that securities companies take from banks for margin lending and loans that single investors borrow directly from banks.

Margin trading refers to the practice of investors borrowing money from brokerage companies to purchase securities worth more than the investors’ net asset value in their accounts. — VNS