NRB wary of rise in cases of multiple banking
KATHMANDU: The practice of multiple commercial banks extending loans of big size to same clients has prompted Nepal Rastra Bank (NRB), the central bank, to launch an investigation into cases of multiple-bank lending, which, if allowed to grow further, could raise default risk in the banking sector.
NRB recently found that several commercial banks had provided credit ranging from Rs one billion to Rs three billion to each of around 10 corporate houses.
“Most of this credit was in the form of working capital and was obtained in the first quarter of the current fiscal year, (which began in mid-July),” NRB Spokesperson Manmohan Kumar Shrestha told The Himalayan Times. “We are now closely monitoring this trend, as the practice of single borrower obtaining loans from various banks has made us suspect whether credit is crowding at a limited place.”
The investigation, however, is not aimed at discouraging banks from extending loans, Shrestha clarified. “So, banks that are reaching out to genuine borrowers — who are making timely payment on loans obtained in the past — need not worry.”
Although it is not illegal for a single corporate house to borrow money from multiple lenders, the central bank asks banks to monitor such activities closely because it encourages over-borrowing. Over-borrowing, in turn, raises vulnerability of borrowers, which may eventually lead to moral hazard and prompt borrowers to default.
Such a scenario may have cascading effect, as borrowers unable to repay debt of one institution will most likely default on payment at other institutions as well, giving a jolt to several banks at once.
“In this regard, banks should practice caution and extend loans after carefully scrutinising the quality of assets pledged as collateral and credit history of borrowers,” Shrestha said.
Surprisingly, many banks here do not follow standard set of rules while issuing loans, especially to big corporate houses, at least two bankers told THT. “It’s because of company’s reputation,” a banker said on condition of anonymity.
Banks may have been engaged in seemingly haphazard lending lately as credit demand is low at the moment, and they are competing with each other to rope in limited number of clients so as to keep profit levels intact.
Probably because of this reason, commercial banks were able to extend loans to the tune to Rs 126 billion to the private sector in first six months of current fiscal, as against Rs 67 billion in the same period last fiscal, shows latest statistics of Nepal Bankers’ Association.
Expansion of credit is good news for the country as it helps raise economic output. But is the credit growth healthy? That’s what NRB seems to be concerned about at the moment.
What has raised NRB’s eyebrow at present is that most of the cases of multiple-bank lending are related to working capital loans, which are generally extended on the back of anticipated cash flow of a company or against the security of stock of goods held by the firm.
And since no one keeps track of such movable assets used as security, one cannot rule out the possibility of companies pledging the same collateral, like stock of goods, at various banks to obtain loans.
Again, it is not illegal to obtain loans by pledging the same collateral at different banks. But the sum of credit obtained from different banks should not exceed the value of asset pawned as collateral.
Also, banks that are extending loans to the same client on the back of same collateral must sign pari-passu agreements. This pact entitles every bank that has extended loan proportional stake in the collateral if the borrower defaults on loan payment.
“But many banks do not sign such agreements here because of borrower’s reputation, which is not prudent,” the banker said.
NRB is currently scrutinising these activities. “We will take action if anyone is found violating banking rules,” Shrestha said.
Base rate violation
KATHMANDU: Nepal Rastra Bank has started to closely monitor banks that are extending loans at below the base rate published by them every month. “We have found that banks are extending loans to big corporate houses at rates lower than the base rate. They then neutralise this effect by slapping higher interest rates on small borrowers,” a high-ranking NRB official told THT. NRB introduced the concept of base rate in November 2012 so that banks could use it as a reference rate to fix lending rates. NRB has clearly said that ‘it would be inappropriate to fix lending rates at below the base rate’. This is because base rate is fixed on the basis of cost of fund — cost at which banks obtain deposit and borrow money — operating cost and other costs involved in maintaining cash reserve ratio and statutory liquidity ratio. So, the practice of extending credit at rates below base rate ‘raises question on their long-term sustainability and creates negative effect in the banking sector’. — HNS
Source: TheHimalayanTimes
