Credit myth
Dispelling the long held misconception that more credit is the panacea for the ailing Colombo bourse, recent data shows that stockbrokers have sufficient credit at their disposal, which they are not drawing.
The data obtained by Mirror Business shows that despite the availability of credit to the tune of Rs.10.01 billion as at June 30, 2012, the 28 stockbrokers currently operating in the Colombo bourse had only given away credit amounting to Rs.3.8 billion.
This shows t hat t he stockbrokers still have over Rs.6 billion to be given away as credit to their clients.
The data also shows that three stockbroking companies have exceeded their credit limit by Rs.0.4 billion under the T+30 regime (Trade+30 days), which was later altered by the SEC to T+120.
Meanwhile, four stockbrokers, who recently wrote a letter to the Securities and Exchange
This shows that the stockbrokers still have over Rs.6 billion to be given away as credit to their clients. The data also shows that three stockbroking companies have exceeded their credit limit by Rs.0.4 billion under the T+30 regime
Commission urging the regulator not to relax credit rules that can result in systemic failures, are believed to have taken a policy decision not to extend credit to their clients.
Accordingly, the data demonstrats that excluding these four brokers, as at June 30, 2012, the other 24 brokers had Rs.5.7 billion at their disposal to be given away to their clients.
In their letter to the SEC, these four brokers (IIFL, JB Securities, CT Smith and Somerville) stressed that the regulator never barred brokers from giving credit and the ongoing debate of bourse not picking up due to credit rules is incorrectly framed.
“…the only issue that is at debate is the fund of credit extend by broking firms,” the letter noted.
An independent analyst talking to Mirror Business on grounds of anonymity said that the key reason for the brokers not to give credit despite the availability has been their net capital positions. “Giving out more credit means, they have to pump more money from somewhere to guard their net capital positions,” he said.He also pointed out that certain brokers are yet to provide for some of the shares they bought for their clients when the market was undergoing a speculative rally last year.
“The rationale behind the brokers’ request for credit originates with the belief t hat pumping of more credit would push up the market so that they can settle their net capital positions as the value of the shares they are holding onto would go up,” he added.