Takeover financing rife in Nepali banking
KATHMANDU, OCT 04 -
Some years ago, a fast food chain based in Kathmandu was scrambling to get finance for its expansion project. The banking sector was going through a liquidity crunch, and the chain’s credit request was turned down by many commercial banks. Finally, a mid-sized commercial bank agreed to extend credit after accessing the project’s viability.
The fast food chain used the money to expand its business; and in a few years, it became a successful venture and quality-asset for banks to invest in. Recently, a large commercial bank poached the loan from its rival by offering a much lower interest rate.
In another case, the same mid-sized commercial bank had extended a loan to one of the popular departmental stores at an interest rate of 13 percent per annum. Later, a competitor took over the loan for 10.5 percent interest.
“Our bank took a lot of risk financing those projects during the liquidity crunch, and waited a long time for them to become stable,” said an official of the first commercial bank. “When both the projects have become our quality assets, other players have come forward to reap the benefits.” He added that this was banking, and such things happen. “Currently, we are on our toes that our other loans are not poached,” he said. “Everyday, one or two of our clients come to us and say that they are getting a better offer and bargain for a lower interest rate.”
The practice, which is known as borrower poaching in the banking industry, is not a new phenomenon in Nepal’s financial market, according to bankers. However, they agree that the practice has become rampant since the last quarter of the last fiscal year. Older banks with large portfolios and low cost of funds are found to be involved in this practice. At the moment when commercial banks are flush with excess liquidity and are having a hard time finding quality borrowers, the trend has become an additional headache to bankers.
“Borrower poaching is not illegal, but it is not an ethical banking practice,” said a CEO of a commercial bank. “This will not contribute to the growth of the banking industry.” Instead of getting involved in such poaching, bankers should identify new borrowers, access their projects and loan them money, he added.
Meanwhile, bankers said that while poaching loans, banks offer extra leverage which could make the projects riskier. Mostly, newer commercial banks which have a higher cost of funds are practicing this type of activity. A banker whose asset was poached recently said that the cost of funds for new banks is high, and they cannot compete with older banks in terms of interest rate.
Such banks, under immense pressure from their own board to show growth, offer extra leverage to entice borrowers.
“There is an instance where one of our rival banks offered one client, a mid-sized manufacturing firm, Rs 80 million of leverage. Earlier, we were offering a leverage of Rs 20 million,” said a CEO of a commercial bank. “The firm’s annual turnover is just Rs 40 million, and there is no possibility of massive growth too.” He added that such excess leveraging will ultimately make the asset toxic.
Different bankers said that this practice of borrower poaching existed, and that it was very risky. They said that risk assessment is heavily compromised in doing so. “Such behaviour shown by banks is unnecessarily increasing the client’s appetite to take risks,” said a CEO of a commercial bank.
Apart from engaging in loan poaching, commercial banks have been following a loose credit policy lately to manage the excess liquidity parked in their vaults.
According to the latest statistics, deposits with commercial banks have fallen by Rs 1 billion while credit has increased by Rs 18 billion over the last two and half months. As of September 28, bank deposits have reached Rs 861 billion while lending stood at Rs 636 billion.
Bankers said the growth in lending was due to a loose credit policy adopted by commercial banks. “Banks have been liberal when it comes to lending of late,” said a CEO of a commercial bank.
If the situation prolongs, it may encourage banks to extend loans to risky areas too. “When there is no credit demand for a long time, banks are under pressure to increase it by any means,” said Sovan Dev Pant, CEO of Lumbini Bank. “This might increase toxic assets.”
Although lending has increased, bankers are unable to say where the credit is flowing which, according to Pant, is another thing to ponder. “We don’t
know about the sector that has been receiving increased lending which is worrying,” said Pant.
“This indicates that lending might have gone to unproductive sectors.” Pant added that the regulator and individual players must keep a close watch on it.
Since there is no credit demand from the industrial sector, most of the increased lending might have gone to consumption, according to a majority of bankers.
Source: The Kathmandu Post
