BSEC proposes easing margin lending; experts urge caution

Highlights:

• BSEC proposes higher margin financing limits for intermediaries
• Minimum investment threshold to fall from Tk5 lakh to Tk3 lakh
• Experts welcome liquidity boost but warn against excessive leverage

The Bangladesh Securities and Exchange Commission (BSEC) has proposed sweeping amendments to its margin loan regulations, easing several key provisions in an effort to improve liquidity in the capital market while strengthening the overall risk management framework.

Market participants say the proposed reforms could inject much-needed liquidity into the market by expanding margin financing capacity and making the facility accessible to a wider pool of investors. However, they also express caution that easier access to leverage could encourage speculative trading and increase market risk if not accompanied by effective regulatory oversight.

The securities regulator approved the draft amendments to the Bangladesh Securities and Exchange Commission (Margin) Rules, 2025 on 14 July. The draft was published on the commission's website today (19 July) for public consultation, with stakeholders invited to submit their opinions within the next two weeks.

Infographic: TBS

Financing capacity set to expand

The most significant amendment would raise the maximum margin financing limit for stockbrokers, merchant banks and portfolio managers from three times to five times their core capital or net worth, whichever is higher.

According to market participants, the existing ceiling has limited the ability of many institutions to meet investor demand for margin loans. Raising the limit is expected to expand financing capacity, improve market liquidity and support trading activity at a time when the capital market continues to face a prolonged liquidity shortage.

The regulator has also proposed lowering the minimum investment threshold required to qualify for a margin loan from Tk5,00,000 to Tk3,00,000, making the facility accessible to a larger number of retail and mid-sized investors.

The draft further revises margin call provisions. If an investor's equity falls below 70% of the financing amount, the margin financer will issue a margin call and provide three trading days for the investor to restore the required equity. If the investor fails to do so, no additional financing can be provided, while the financer may sell securities to rebalance the account. If equity drops below 50%, the financer will be allowed to liquidate securities without prior notice.

To discourage leveraged investment in fundamentally weak or overvalued stocks, the regulator has retained and clarified the eligibility criteria for marginable securities. Companies with a price-to-earnings (P/E) ratio above 30 or negative earnings per share (EPS) will remain ineligible for margin financing.

For banks, non-bank financial institutions (NBFIs) and other financial service providers, price-to-book (P/B) ratio will replace the P/E ratio as the valuation benchmark. Securities with a P/B ratio above 3, and insurance companies with a P/B ratio above 1, will not qualify for margin financing.

The draft also states that only eligible securities listed on the main board will qualify for margin financing. Securities listed under the G, N and Z categories, as well as those on the SME, ATB and OTC platforms, will remain ineligible.

Among other proposals, investors will be allowed to maintain both a cash account and a margin account with the same margin financer. Margin agreements will be automatically renewed unless terminated by either party. In addition, a margin financer will not be allowed to invest more than 20% of its total outstanding margin portfolio in a single security, while margin financing will remain capped at a 1:1 equity-to-loan ratio for general securities and 1:0.25 for listed life insurance companies.

Experts welcome reforms but urge caution

Md Ashequr Rahman, managing director of Midway Securities, said the proposed amendments are significantly more flexible than the existing margin loan framework and are likely to improve liquidity in the capital market. 

He welcomed the move to determine the margin eligibility of banks, non-bank financial institutions (NBFIs) and insurance companies based on the price-to-book (P/B) ratio, saying it is a more appropriate valuation metric for financial institutions. 

He also said reducing the margin call threshold from 75% to 70% would give investors greater flexibility to withstand short-term market volatility. Raising the financing cap to five times a margin financer's core capital or net worth would expand lending capacity and help ease the market's prolonged liquidity shortage. 

However, Ashequr cautioned that easier access to margin loans could also encourage speculative trading if not backed by strong regulatory oversight. Recalling the 2010 stock market crash, he stressed that effective risk management and supervision are essential to prevent excessive leverage and avoid repeating past mistakes.

Akramul Alam, head of research at Royal Capital Ltd, said the proposed amendments are logical and better aligned with current market realities. 

He believes the revised rules make the margin financing framework more flexible, which should gradually improve liquidity in the capital market over the long term. 

Alam welcomed the decision to replace the Price-to-Earnings (P/E) ratio with the Price-to-Book (P/B) ratio for banks, NBFIs and other financial institutions, calling it a more appropriate and internationally accepted valuation method. 

However, he noted that the P/E threshold for other sectors has been reduced from 40 to 30, making the eligibility criteria stricter. Overall, he said the amendments strike a better balance between boosting liquidity and containing risk, creating a stronger framework for margin financing.