Eight questions a bank must answer before funding a stockbroker’s margin book in Nepal
Nepal’s margin trading rules were rewritten in 2082. SEBON’s Margin Trading Facility Directive, 2082 and NEPSE’s Margin Trading Facility Procedure, 2082 replaced the older 2074 and 2075 versions, a Brokerage Business Strengthening Policy, 2083 followed, and a fuller Margin Loan Trading Facility Regulation, 2083 is in draft (SEBON’s introductory note explains its intent).
Under these rules the broker lends to the investor. But brokers have thin balance sheets, so the money has to come from somewhere, and that somewhere is a bank. The chain becomes bank to broker to investor. This post walks through the questions a commercial bank has to settle before offering that wholesale line.
1. How should a bank price it?
A bank has three natural reference points on its own books. Wholesale lending to microfinance is priced close to the base rate, but it is a poor comparator: that is targeted-sector lending with capped rates, and broker funding is neither capped nor low risk. A bank’s own retail loans against shares sit higher. The closest match is ordinary working capital (cash credit) lending, because this facility is also secured on receivables and needs frequent monitoring, arguably more frequent than a normal working capital loan.
Market talk puts current bank-to-broker pricing at roughly base rate plus 0.50% to 1.00%. The advance rate matters as much as the headline rate. Some banks reportedly fund 100% of eligible margin receivables and others 80%, leaving the broker to fund the rest from costlier sources. If a competitor lends at rate i against an advance rate b, and the broker’s own cost of funds is e, a bank funding 100% can charge up to:
b × i + (1 − b) × e
With a competitor at 8% on 80% and a broker cost of 9%, that is 0.8 × 8% + 0.2 × 9% = 8.2%, and the broker is no worse off.
For context, brokers’ announced rates to investors in October 2026 were 7.5%, 8.0% and 7.99%. Those are broker-to-investor rates, not bank-to-broker rates; the gap between the two is the broker’s spread.
2. What risk weight does it carry?
Under NRB’s Capital Adequacy Framework 2015, clause 3.3(d)(1), a claim on a domestic corporate is weighted by its credit rating: 50% at best for AAA, and 100% for BBB+ and below and for anything unrated. Of the 31 margin-approved brokers, seven had bank-facility ratings from CARE Ratings Nepal in 2026, covering about NPR 11 billion of rated (not necessarily drawn) facilities. They range from A4+ to A2+ short term / A- long term. In practice, a bank should plan on 100% for almost every broker.
3. Why is this market opening up now?
Because leverage already exists, just informally. Rule 8(2) of the Securities Transaction Operation Bylaws, 2075 lets a broker execute a buy order against a 25% advance, with full settlement due at T+2. That window has been misused: cheques drawn on unfunded accounts, credit against unverified collateral, and alleged mixing of client funds, all of which created artificial buying power and drew SEBON enforcement. Meanwhile formal margin trading was almost nil, about NPR 2.28 crore in FY 2081/82 per SEBON’s annual report. The appetite was there; the formal channel was not.
That is changing. NEPSE has approved 31 brokers for margin trading out of the 90 licensed, with more in the pipeline. It publishes the list of eligible shares and a record of margin trades. Brokers are moving to integrated platforms such as DG Hub that handle margin alongside cash trading, and the better-governed ones see formal margin as a way to regularise the client credit they already carry.
4. Which brokers should qualify from lender’s perspective?
Broker earnings swing with turnover, and the main thing a lender wants to know is whether the broker is already running an informal margin book. Four tests (and these are not statutory tests but definitely recommended), capture this:
| Indicator | Test | What it catches |
| Return on equity | 3-year average of at least 15% | Profitability that survives a market cycle |
| Abnormal client financing | Receivables beyond T+2 below 7 trading days of average daily buy turnover | Unapproved credit to investors |
| Capital exposure | Those excess receivables below 30% of net worth | Losses that could wipe out thin capital |
| Sector concentration | Broker’s sector HHI no more than 1.25× NEPSE’s, over 12 months | Trading bunched in a few sectors |
Receivable ageing should be read alongside, to separate genuine settlement float and authorised margin loans from overdue client balances.
5. How big could the market be?
Section 9(1) of the Directive lets a broker extend margin facilities up to five times its certified net worth. Take 31 brokers with NPR 30 crore each: 31 × 30 crore × 5 = NPR 46.5 arba. At NPR 60 crore each it is NPR 93 arba. These are ceilings, not forecasts; Section 8(2) separately caps specified borrowings at 4.5 times net worth, and actual net worth varies widely.
On the retail side, banks’ direct lending against shares (retail margin lending) is estimated at NPR 80 to 90 arba, about 1.6% to 2.0% of commercial bank credit. Put together, the indicative leveraged-equity market is NPR 126.5 to 183 arba.
6. Can the bank take the investors’ shares as security?
This is the instinctive ask, and the answer is effectively no. Under the National Civil Code, 2074, the broker is only a pledgee of the investor’s shares. It never owns them. Section 588(2) denies security rights to a lender who accepts property the borrower does not own, and Section 566(2) restricts passing a pledge onward unless the investor expressly consents under Section 566(4). A sub-pledge would therefore need a tripartite agreement signed by every investor.
Securities law points the same way. Rule 31(1) of the Securities Businessperson Regulations, 2064 bars using client funds or securities for the broker’s benefit, Regulation 8(3) of the Directive bars using one client’s assets to finance another, and Section 71(2) of the draft 2083 Regulation prohibits sub-pledging outright. Even if it could be structured, the forced sale is still run by the broker; all the bank wants is the proceeds.
The workable route is the Secured Transactions Act, 2063. The bank registers a security interest over the broker’s present and future margin receivables, including the right to principal, interest and fees under the margin agreements. The bank’s claim is on what investors owe the broker, not on the shares themselves.
7. How much control does the bank have over the cash?
Limited, and it is better to say so plainly. Trades must settle through the broker’s clearing accounts at the clearing banks designated by CDSC, under the Clearing and Settlement Regulations, 2069. A lender cannot require that flow to pass through its own account. The sequence is:
- The bank sanctions a line to the broker through a control account.
- The broker lends to investors, each with a separate margin trading and margin demat account.
- Investors trade; settlement runs through the clearing account.
- Investor entitlements are paid directly to investors from the clearing account.
- Only the broker’s own residual (principal recovered, interest, commission) moves to the control account.
- The bank sweeps that account to service the loan under an agreed repayment waterfall.
A bank-owned broker is not excluded from any of this. A subsidiary with the required approvals can borrow from its parent, provided the terms are arm’s length and prudential limits are respected.
8. What happens when the market falls?
The investor puts in at least 30% (initial margin). If equity falls below 20% (maintenance margin), the broker issues a margin call to be cured by the next trading day, in cash or in eligible listed shares valued at a 60% haircut. If it is not cured, the broker can sell. If equity touches 15% after a call, the broker can sell without further consent. Note that the cure only restores 20%, not 30%, so the cushion is thinner than the headline suggests.
For a position of 100 bought with 30 of equity and 70 of loan:
| Price fall | Position value | Equity left | Equity ratio |
| 10% | 90 | 20 | 22.2% (safe) |
| 12.5% | 87.5 | 17.5 | 20.0% (margin call) |
| 15% | 85 | 15 | 17.6% (curable) |
| 25% | 75 | 5 | 6.7% |
| 30% | 70 | 0 | 0% (loan exposed) |
| 35% | 65 | −5 | Negative equity |
The lender to the broker is hurt only when a fall outruns the broker’s ability to sell, which is why screening, stock eligibility and concentration limits matter more than the collateral paperwork. NEPSE’s 15% trading halt slows a fall but also delays the exit. The draft Regulation adds exposure limits, stress testing, early-warning systems and systemic monitoring on top of daily mark-to-market.
On contagion, the numbers are modest for now. If margin lending came to finance NPR 50 arba of purchases against a market capitalisation of about NPR 4,630 arba, that is roughly 1%. Indicative peer figures are about 1% in India, 0.5 to 1% in Sri Lanka, 2% in the UK, 2 to 3% in the US and 3.5 to 4% in China.
The short version
Broker margin funding is working capital lending with a capital-market wrapper. Price it off cash credit, assume a 100% risk weight, secure the receivables rather than the shares, accept that cash control is partial, and let broker selection do most of the risk work.
This post reflects the author’s reading of the rules and public sources at the time of writing. It is not legal or investment advice, and the draft Regulation may change before it is approved.