Few banks show interest on credit insurance

KATHMANDU:

Credit guarantee has not gained any momentum due to lack of proper awareness among the financial institutions. In the last fiscal year, Deposit and Credit Guarantee Corporation (DCGC) saw the amount of loans insured move up by less than one per cent only compared to a fiscal year ago. But the amounKATHMANDU: Credit guarantee has not gained any momentum due to lack of proper awareness among the financial institutions. In the last fiscal year, Deposit and Credit Guarantee Corporation (DCGC) saw the amount of loans insured move up by less than one per cent only compared to a fiscal year ago. But the amount of loans and advances floated by the commercial banks has increased by 12 per cent in the last fiscal year.

“This fiscal year, DCGC has insured the small loans worth Rs 4.5 million,” informed general manager of DCGC Bhola Prasad Sharma Adhikari. The corporation has collected credit guarantee fee of Rs 19.7 million for their service while the claims payment amounted to Rs 4 million in the fiscal year 2010-11.

The DCGC had expected to insure loans worth Rs 290 million in the last fiscal year but has failed in achieving the target.

“There is not enough awareness about credit guarantee leading to such small amount of loans being insured,” he said, adding that the DCGC had insured the loans worth Rs 4.17 million in fiscal year 2008-09, while in 2009-10 the credit insurer insured the credits worth Rs 4.46 million, excluding the loans insurance covered under Small and Medium Enterprises (SMEs).

The credit insurance started in 1970s after Nepal Rastra Bank (NRB) started its directed lending to deprived sector in order to increase financial accessibility of the poor population.

Though, the central bank does not direct lending of banks anymore it still has made lending to deprived sector, an obligation for the financial institutions.

According to monetary policy, the commercial banks have to lend 3.5 per cent of their total loans to deprived sector while development banks and finance companies’ loan portfolio should contain three per cent and 2.5 per cent.

However, lending to deprived sector is considered to be high risk for the banks as the collaterals are low quality and the chances of repayment are also vulnerable.

Credit insurance of such vulnerable loans can be the way for the financial institutions to satisfy the regulator’s requirement along with minimising their risk. 

“The progression of credit guarantee amount is really low; however, lately more and more banks seem to be interested in getting their small loans insured just in case it goes bad,” said Adhikari. Only about a dozen commercial banks that insured their small credits floated under priority sector programmes.

“Credit insurance is especially useful for the micro loans floated by microfinance institutions as these are considered relatively risky more so in the case of livestock loans,” he said, adding that there are about 10 microfinance banks that have got their loans insured by DCGC that offers four types of credit insurance for the loans under the headings of Priority Sector Loan, SME Loans, Livestock Loans and Micro Finance Loans.

The banks that float loans under the headings get the loans insured at DCGC in case the borrower defaults. The banks get up to 75 per cent of the defaulted amount from DCGC. For the service DCGC is paid guarantee fee that can be passed on to borrower.

Citizens Bank insures deposit

Citizens Bank International (Citizens) has got its small deposits up to Rs 200,000 insured by Deposit and Credit Guarantee Corporation (DCGC) becoming the second commercial bank to get its deposits safeguarded after Mega Bank Nepal. According to the deposit guarantee regulation, in case of bankruptcy of a financial institution, a small depositor, who has a deposit up to Rs 200,000, will be paid the total deposit amount and interest within 90 days from the date the institution goes under liquidation by DCGC.t of loans and advances floated by the commercial banks has increased by 12 per cent in the last fiscal year.

Source: THT