The NEPSE index history is utterly fascinating not just because it tells the story of the Nepali share market which it does superbly, but because it also tells the story of our nation as a whole.
In only the last 20 years, we’ve gone through a 13-year civil war, the global financial crisis, multiple banking crises, 8M earthquake, and most recently the COVID-19 pandemic.
So, let’s take a deep dive into the history of NEPSE.
Establishment of NEPSE
The history of the securities market in Nepal began with the flotation of shares by Biratnagar Jute Mills Ltd. and Nepal Bank Ltd. in 1937.
And in 1963, an informal group of traders met every day to start trading at 11 am on Chowk Bazar (Old Market) ground near Singha Durbar (the old Royal Palace).
Introduction of the Company Act in 1964, the first issuance of Government Bond in 1964 and the establishment of Securities Exchange Center Ltd.(later converted to NEPSE) in 1976 were other significant developments relating to capital markets.
The Nepal Stock Exchange (NEPSE) was formally established in 1993 by the Nepal Government, under a program initiated to reform the capital markets which to this day is the only stock exchange in Nepal.
And the NEPSE Index which is an index of the prices of securities listed on the Nepal Stock Exchange serves as a standard method to track the performance of listed stocks.
NEPSE Index: Bull Market 2004-2008
2007-2008 was a remarkable year for the share market. With the restoration of peace after a lengthy Maoist insurgency and subsequent boost of investor confidence, almost all previous records of the then young NEPSE were shattered during this period.
From 194 in March 2004, the NEPSE index charged upward, eventually hitting a peak of 1089 on 28 August 2008. A compounded annual growth rate of 53.92 % over four years.
Almost all the major indicators of the secondary market like the number of shares traded, the number of listed shares, the number of transactions, annual turnover, total market capitalization of listed shares, market capitalization and GDP ratio, turnover to market capitalization and the GDP ratios all increased during this period.
It was during this period that the Nepal Rastra Bank had issued directives to increase the capital base of banks and financial institutions. This had a major impact on the market value of listed shares. Most of the companies opted to issue bonus and right shares to increase their capital base. It created buying pressure on the market as investors were attracted by the offering of bonus shares and right shares.
Commercial banks’ market capitalisation stood at 72.77% of the entire market.
It was also during this period that the financial sector grew at a remarkable rate after the introduction of financial sector reform programs.
“A total number of 16 new banks and financial institutions were established in 2006/07. These included 2 commercial banks, 9 development banks, 4 finance companies and a micro-finance institution.
The following chart shows the capital mobilization trends during this period in the primary market.
What caused the decline?
The market decline started when the impact of the global financial crisis was felt on our economy, although indirectly.
The domestic economy experienced a decrease in tourism receipts, foreign aid commitments from developed economies, and export to developed economies. The growth rate in remittances also declined. But the biggest decline was in Foreign Direct Investment (FDI) which stood at just $0.9 million dollars in 2008.
Nepal’s GDP growth also went on a decline from 6.10% in 2008 to 4.5% in 2009, 4.8% in 2010 and 3.42% in 2011 according to WB Data.
However, the main culprit was the brewing banking crisis.
The unnatural growth in the number of BFIs led to cutthroat competition for deposits. They started giving out easy loans to real estate and housing sector borrowers without assessing their borrowers capacity to make interest and principal payments in time.
It led to a rapid rise in demand for real estate and housing construction in urban areas and an escalation of its prices. When the abnormally high prices started to fall, the borrowers were unable to pay back interest and principal in time, leading to a shortfall of liquidity in the banking industry.
When Vibor Bikas Bank (VBB) asked the Nepal Rastra Bank (NRB) on June 9, 2011 to either inject money in the development bank or to take over management, it rattled the banking industry and the already suspicious depositors. Investors grew fearful as rumors and anticipation circulated that due to banks’ excessive loan exposure to real estate, housing and construction sectors, they’ll soon land in the red.
By overlooking the need for having a limited number of BFIs, the evolving depositor base, and financial penetration over the years, the NRB let too many BFIs to pop up. It created a BFI bubble. This was followed by intense competition of not only between banks in the same category but also between BFIs in different categories, leading to an informal war in offering high deposit rates and lending without differentiating markets, products, and borrowers’ creditworthiness. It reflected bad corporate governance, and a lack of innovation and R&D in the sector. The resulting lending surge in real estate and housing markets unnaturally swelled their prices, leading to a real estate and housing bubble.Source: Sawtee.org Nepalese Banking Crisis Explaiend
All of these factors contributed to the stock market decline from 2008 to 2011.
NEPSE Index: Bull Market 2012 – 2016
After a protracted bear market, the NEPSE index raced from a low of 298 in 2012 to a meteoric peak of 1881 in August of 2016, an increase of more than six times. An astonishing compounded annual growth rate of 58.50%.
The economy after a period of low GDP growth started accelerating in 2012 with moderate growth of 4.43%, eventually growing by 6.00% in 2014. The 2015 8M earthquake put a dent in the economy with the GDP growing by just 0.43%. However, the economy showed great resilience when the very next year the GDP grew by 8.97% in 2017, the largest GDP growth rate in 33 years.
By this time, the Securities Board of Nepal (SEBON) and NEPSE had fully implemented the dematerialisation system for share trading. The daily average turnover touched Rs 890.38 million in the fiscal year 2016-17, which stood at just Rs 93.08 million in 2012. A jump of nearly 10 times the volume.
“Introducing the dematerialisation system played a significant role in developing the capital market. It not only increased the turnover but the market also became more systematised,” said Murahari Parajulli (Information Officer for NEPSE) in a Himalayan Times article. He also added, “Positive political environment and systemic changes are the major causes of the increase in daily turnover in the secondary market,”. This was also the period when broker companies started transacting shares from outside the Kathmandu valley which also helped increase the turnover.
In addition, interest rates had declined from 2012 to 2016, leading to people borrowing more and flooding the stock market. The lending rate had declined from 12.0% to 8.6% by 2016. As whenever there is an abundance of credit, the credit easily flows to the different sectors of the economy with the stock market not being an exception. The easily available credit helped to increase the demand in the stock market. The required return on investment declined with decreasing interest rates hence, increasing the valuation of stocks.
The Credit Crunch of 2017
Starting in 2016-2017, banks and financial institutions started facing an acute shortage of lendable funds, this is often referred to as a credit crunch.
The amount banks can lend is directly linked with the amount of deposits that they can collect. As the amount of money that BFIs can lend to their borrowers is restricted by the Nepal Rastra Bank to 80% of total core capital and local currency deposits. This ratio is known as the CCD (Credit to Core Capital and Deposit) ratio.
As you can see in the chart, this ratio stayed near the regulatory threshold of 80% for more than two years so banks couldn’t lend anymore during this period.
Banks had to increase their deposits (in higher proportion) if they intended to disburse new loans. However, during this period, growth in credit outpaced growth in deposits.
This was further exacerbated by the fact that remittance growth had declined which is one of the major sources of deposits for BFIs. And the widening trade deficit curbed the deposit growth required for higher credit expansion.
As interest rates rose, the market tumbled and continued to do so till the end of 2019.
The calm before the storm
The NEPSE index continued its downward spiral and reached a low of 1100 and hovered there till the end of 2019.
Then the market raced to 1600 in a matter of 3 months from December 2019, before nationwide lockdowns were announced which promptly dropped the market back to 1186.
In fact, the NEPSE remained closed for an entire month and a half between March and May 2020.
With the economy coming to a grinding halt, NRB announced a flurry of new relief measures to keep the economy afloat. The central bank
- Announced liquidity boosting measures such as cutting the cash reserve ratio requirement for BFIs by one full percentage. This is the portion of deposits that BFIs have to hold as reserves with the central bank.
- Provided refinance facility to banks for loans issued in sectors that were affected by COVID-19. The refinance fund was also later increased from 50 to 60 billion.
- Allowed commercial banks to accept gold as interest-earning deposits which injected more cash into the market as well as helped the banks to maintain their obligation for liquid assets.
- It relaxed the repayment of loans for businesses and individuals. Whether it’s individuals with home loans, auto loans and educational loans or firms that have borrowed from BFIs to do business didn’t need to be worried about defaulting on their loans.
The weighted average interest on credit was 12.32% in March of 2019, the rate went as low as 8.43%. A record low that has not been seen since the last bull market.
Over the last year, remittance from Nepalis abroad also grew significantly bolstering the foreign reserves and bank deposits.
NEPSE Index: 2020 -2021
NEPSE saw the most impressive growth ever seen when it went from a low of 1186 to reach its all-time high of 3207 in just 14 months.
This period also saw large-scale adoption of online TMS (Trade Management Software) which saw an influx of a record number of retail investors and traders alike making online trades in the market.
Where are we headed?
Nepal Rastra Bank has taken several initiatives to cool the overheating stock market.
It announced a limit on margin loans which instituted the maximum an individual investor can borrow capped at 12 crores total with a cap of 4 crores with a single bank.
It also announced a series of conservative directives for banks, development banks and microfinance companies.
The ADB forecasts a growth rate of 4.1% for FY 2022, up from an estimated growth of 2.3% in FY2021.
Only time will tell where NEPSE will head next!
NEPSE Index Timeline
- 1993: Establishment of NEPSE
- 2008: All-Time High of 1089
- 2016: All-Time High of 1881
- 2021: All-Time High of 3207
Where do you expect NEPSE to go next?