Central bank suspects loans misuse

KATHMANDU, MAR 30

Nepal Rastra Bank (NRB) has discovered that a sugar mill which owes Rs250 million to cane farmers had not been making use of working capital loans.

The mill had borrowed Rs200 million and spent half of it, but things are quiet at its plant and no sugarcane has been seen in its warehouse.

“However, the mill has been making repayment instalments on a regular basis,” said Min Bahadur Shrestha, spokesperson of NRB.

He explained that this was an example of how loans were being misused without spending them on whatever purpose they had been taken for.

“We believe that the loan amount has been used for other purposes and that there has been capital flight,” said Shrestha. “Banks have been told to make a 5 percent provisioning for such loans to discourage such practices,” he added.

The central bank has long been asking banks to keep their deposit interest rates high to discourage people from depositing their money outside the country.

Deposit interest rates in India are much higher than in Nepal. Lately, interest rates have dropped due to excess liquidity in the banking system. The situation has now largely eased.

According to a director of a leading bank, traders have been taking advantage of the interest rate difference by depositing money in Indian banks.

“They are taking short-term loans from Nepali banks on which they pay very low interest and depositing the money in Indian banks where the interest rate is higher,” he said. “They are making large profits without any risks.”

In India, the interest rate on one-year fixed deposits is in the range of 9 percent while Nepal banks have been offering short-term loans at rates as low as 7 percent.

Other bankers also don’t reject the possibility. There has been a massive rise in the current fiscal year with the productive sector getting massive amounts in loans compared to deposits.

“It is true that despite new loans worth Rs153 billion being released over the first eight months, their impact on the economy has not been visible,” said Rajan Amatya, deputy general manager of Nepal Investment Bank.

“So, questions can be raised whether the borrowers have been using the money for their stated purposes.”

However, he added that banks had been forced to lend more as they cannot make good earnings with low lending as the spread rate cannot be increased over 5 percent.

Source: The Kathmandu Post