Bankers want no base rate on old loans

KATHMANDU, OCT 15, 2012

Bankers have demanded old loans be exempted from the base interest rate that the central plans to introduce soon. The Nepal Bankers’ Association ( NBA ) made the demands in its official suggestion submitted to the central bank on Sunday.

Base rate is the minimum interest rate that banks should charge on lending. Once introduced, the banks are not allowed to extend loan to borrowers below the base rate.

Lending below that rate would be infeasible for the banks as it is fixed based on minimum cost of fund.

Bankers argue that some projects, to which they have lent, are carrying low risk and it would be unfair to hike the interest rate on their loans . “The central bank must seriously consider this demand,” said an NBA executive member. Some bankers, however, dismissed the demand as illogical saying that the NBA had sent the suggestion under the pressure from a couple of commercial banks.  The Nepal Ratra Bank (NRB) is yet to decide on whether to allow banks to continue with the older rate for the older loan.

“We have just received their suggestion, and will decide upon it in our next board meeting,” said a senior NRB official. “It is more likely that we will allow some time for banks to revise their interest rate in line with the base rate on loans that were disbursed earlier.”

The NBA have also suggested the central bank to allow banks to calculate cost of fund on quarterly basis rather than the annual basis as asked by the NRB.

“If fund is calculated on annual basis, the base rate of some of the commercial banks might reach as high as 16 percent,” said the NBA executive member. In another suggestion, the NBA has asked the central bank to be clear on application of base rate on consortium loans . “We have asked that in case of consortium loan, the effective base rate should be an average of the base rates of all the consortium banks,” said a banker.

Similarly, the commercial banks have asked the central bank to allow them to charge interest rate below the base rate for loans disbursed against the special collateral such as cash and government bonds, fixed deposit and foreign bank guarantee.

“Such collateral makes the loan less risky. As they are highly liquid, a bank can recover the loan amount easily even if it is defaulted,” said the banker.

Meanwhile, another NRB official said that they were working on war footing to introduce the base rate before Dashain. The central bank, through its monetary policy, had formally made the announcement to introduce base rate for the commercial banks to make lending pricing more transparent.

However, the regulator formally invited bankers to discuss on the issue only after mid-September. During the meeting, the NRB gave the bankers tentative idea and different variables to be considered while calculating the base rate.

According to the NRB, bankers have been asked to consider pure cost of fund, cash reserve ratio, statutory liquidity ratio, operating cost and minimum predetermined return on investment before calculating the base rate.

Banks are required to maintain six percent of CCR, which means the amount stays idle in the NRB vault. They also have to maintain 15 percent SLR by investing in government treasury bills and bonds, and maintain cash reserve in their own vault.

Source: The Kathmandu Post

NRB agrees to allow banks to buy good loans from NSMFL

KATHMANDU, DEC 09-2011

Nepal Rastra Bank (NRB) has agreed to allow banks with money stuck at beleaguered Nepal Share Markets and Finance Limited (NSMFL) to buy good loans from it. According to a senior NRB official, the central bank will issue a directive soon to give a formal go-ahead to the banks that have Rs 680 million invested in NSMFL in the form of inter-bank lending.

Once the central bank’s directive is issued, the commercial banks will be allowed to buy loans that are worth double the amount of the inter-bank credit they have given to NSMFL. Bankers had asked NRB to intervene after NSMFL defaulted on interest payments on the loans they had provided under inter-bank lending.

The Nepal Bankers Association (NBA) had sent a letter to NRB on behalf of the seven commercial banks seeking its support to collect interest which had remained unpaid since June after its former chairman Yogendra Prasad Shrestha fled embezzling billions of rupees. The letter asked NRB to treat inter-bank lending like regular individual deposits and give them the authority to purchase loans of NSMFL against the amount lent as inter-bank lending.

This decision will provide respite to the commercial banks which were worried after the Due Diligence Audit (DDA) report of NSMFL revealed that, out of the total lending, about 45 percent or Rs 2 billion, was of a non-performing nature including fake loans issued by Shrestha.

“This decision is a win-win situation for all the parties—commercial banks, NRB and NSMFL,” said a banker who had extended millions in loans to NSMFL in the form of inter-bank lending.

“Since we are buying loans worth double our lending, NSMFL will get liquidity of about Rs 680 million which it can use to repay its depositors.”

Apart from the inter-bank loans, the finance company has an additional liability of Rs 2.18 billion in the form of deposits placed by individuals and institutions. Although some of the bankers have termed the situation “not perfectly ideal” with the commercial banks having excess liquidity and insufficient avenues to lend, purchasing loans from NSMFL can be a blessing in disguise.

“Once the central bank issues the directive, the commercial banks will start appraising the different loans from NSMFL’s portfolio,” said another banker involved in inter-bank lending. “In doing so, we will make site visits to the projects, talk to the borrowers, analyse their cash-flow statement, look at the repayment history and make our decisions.”

The meeting, however, did not decide the distribution of loans among the banks as all of them have agreed to do it on mutual understanding.

Source: Kantipur