Banks' dominance in stock market increases risks for investors

 Kathmandu, Mar. 8

With commercial banks that have about 6 per cent contribution to the Gross Domestic Product (GDP) of the country occupying 51 per cent weightage in the stock market, investors have limited options for market diversification.

Diversification of investment portfolio is important in order to lower the risks in the stock market investment. "But in Nepal's share market, there are limited options for risk reduction by diversifying portfolio," said Niranjan Phuyal, Acting Manager of the Nepal Stock Exchange (NEPSE) Limited, while speaking at a programme in the capital last week.

In addition, other banks and financial institutions have another 15 per cent share in the share market. Development banks cover 5 per cent, finance companies cover 1 per cent and microfinance institutions have 9 per cent space in the stock. If one adds insurance sector – 8 per cent life and 6 per cent non-life insurance companies, in the share market, bank and insurance sector share reaches 80 per cent.

By the end of the last fiscal year, mid-July 2021, 219 companies were listed at the NEPSE of which 147 were financial institutions, 40 hydropower, 19 manufacturing and processing companies, five investment companies, five hotels and tourism enterprises, and four trading companies. Three are from other sectors.

In the current fiscal year 2021/22, additional seven companies have been added to the NEPSE list.

Unprecedented attraction to share market

While the number of investors has gone up exponentially in the last one and a half years after the first lockdown ended in mid-July 2021, the stock market couldn't witness the growth in the number of listed companies and diversification of investment opportunities for the investors.

 According to Purna Prasad Acharya, Chief Executive Officer of the CDS and Clearing Limited, the number of people opening Demat account – an account used to hold shares and securities in electronic format – has grown by 3.4 million in the last 18 months to about 5.2 million. Likewise, about 4.13 million Mero Share accounts are opened so far while by the end of the previous fiscal year 2019/20, there were only 700,000 Demat accounts.

Although most of these accounts were opened keeping in mind the issuance of the initial public offering (IPO) of various companies, it is said that about 1.2 million investors of various level are active in the secondary market.

Risks are high in Nepali share market due to its concentration to banks and financial companies, about 51 per cent of the market capitalisation is occupied by 26 commercial banks. Phuyal stressed on immediate need to attract more companies from the 'real sector' like manufacturing, hospitality, technology and infrastructure.

 Forceful provisions

Former Chairman of the Securities Board of Nepal (SEBON) and former Governor of Nepal Rastra Bank, Dr. Chiranjibi Nepal said that the dominance of BFIs in the share market was due to the central bank's policy to divest 30 per cent shares mandatorily to the public.

"In addition to that, banks earned the confidence of the public. Banks have 90 per cent money of the public while the promotors own just 10 per cent of it. It has high public scrutiny which saves it from immediate financial damage," he said.

Although the number of BFIs was increased due to the forceful measures implemented by the central bank, the government should announce incentives to attract companies from other sectors to the stock market.

"Successful manufacturing companies must be attracted to the share market. It not only bolsters the market but also helps in employment creation and economic growth," said Dr. Nepal.

 Use of carrot and stick

Former Executive Director of the NRB, Dr. Gopal Bhatta said that the capital market regulator SEBON and NEPSE both were established at the initiation of the central bank and the latter had the responsibility to run these institutions.

"Therefore, central bank adopted the policy for the BFIs to be listed forcefully. But there were not such policies for other sectors. Those companies did not go to the public to raise the money, instead resorted to the BFIs to finance their business," he said.

Dr. Bhatta suggested having a provision for the companies with certain capital size to be listed in the stock market.

"Current financial sector share in the stock market does not truly represent the country's economy. BFIs are just the financial intermediaries and have minimal impact on the capital mobilisation," he said, while adding that if the money was mobilised to the real sector, it would have been more productive.

Obtaining money from the BFIs is more expensive than raising it from the stock market.

According to Dr. Bhatta, limited option to the investors makes share market riskier. The regulators and policy makers must work to attract 'real sector' companies to it.

Meanwhile, Chairman of the SEBON, Ramesh Hamal said that he would give priority to policy reforms to attract 'real sector' companies to the stock market. "To facilitate this process, we will promote technological advancement while book building policy reform will also be expedited," he said. 

 Published in The Rising Nepal daily on 9 March 2022.