Intermediaries still sink into Tk8,674cr negative equity in margin accounts 

Key Points-

• 116 out of 460 brokers and merchant banks hold negative equity 
• 6% firms hold 86% of the total bad assets 
• The BSEC wants to bring down negative equity to zero by December 

The stock market bottomed out a decade after the 2010 crash to recover most of what it lost over the prolonged bearish phase. 

But the brokerage and merchant banking industry clearly failed to get rid of their toxic legacies – the negative equity in the margin accounts of their clients who borrowed from them to buy additional shares to maximise gains – and finally failed. 

Brokerage firms and merchant banks collectively hold Tk8,674 crore in negative equity in margin accounts as of 30 September 2021, revealed data compiled by the Bangladesh Securities and Exchange Commission (BSEC). 

The market regulator has asked the industry players to submit their plans on how to get rid of it by December this year as the negative equity proved synonymous to a black hole. 

The regulator found that of the total 460 brokerage houses and merchant banks, 116 are suffering with their negative equity burden. 

Of the 116 firms, 29 merchant banks bear negative equity of Tk3,645 crore, 75 brokers of the Dhaka Stock Exchange hold Tk4,930 crore and 12 brokers of the Chittagong Stock Exchange have Tk98 crore in negative equity, according to the BSEC. 

The regulator also observed that the major portion of the problem is concentrated in less than 6% of the industry firms.  

At the end of September, only 15 brokerage firms and 12 merchant banks were holding Tk,7,500 crore or 86% of the total negative equity. 

Margin loan and negative equity 

Investors use margin loans as leverage to maximise their investment gains as it allows them to buy more shares than what they could only with their own equity. 

When the investment returns positively, the leverage sounds sweet, but it all goes sour when the market value of the invested securities goes down because the erosion of the investor's own capital also multiplies just like the gains in the cases of successful investments.  

According to margin rules, the lender has to call the borrower clients to inject fresh capital when their own capital is about to wipe out amid the market adversity, and in the case of failure, the lender broker or merchant bank would forcefully liquidate the investments to secure the lent money. 

But the universal practice was discouraged by the regulator and policymakers in Bangladesh out of a sympathy to the loser investors. 

As the investment in margin accounts were held tight and the market kept falling, the lenders' money also wiped out and the gigantic sum is the outcome.  

Brokers and merchant banks also need to ensure provisioning against their risky assets in margin loans and the BSEC waived them from that over the years. 

The ongoing waiver is scheduled to end in December this year. 

It was all a story of not addressing the problem at all out of only wishes to recover someday. 

However, since the market recovered a lot, but the negative equity in margin accounts is still very high, the regulator now seems to be rightly addressing the issue after a decade. 

Some of the industry's top brokerage firms and merchant banks had cleared their problems in the last decade before it was too late and they are now enjoying a stronger balance sheet.