Bankers, business leaders divide over new consortium loans rule

Published On: June 21, 2017 01:20 AM NPT By: Sagar Ghimire  | @sagarghi

Bargaining power of business community on interest rates at the heart of the dispute
KATHMANDU, June 21: Business leaders have urged the central bank to put a rule that requires bank and financial institutions (BFIs) to bring multi-bank borrowing above Rs 1 billion into consortium financing by mid-July on hold for the time being. 

They say that such requirement, at a time when the interest rates are at a very high level, would add more financial burden on them.

"The banking industry is in a transition phase now and the interest rates have more than doubled in recent months. While the central bank's provision on consortium financing is positive in itself, we are worried that banking sector would pass the burden of higher rates on consortium loans on the borrower”," Shekhar Golchha, the senior vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said.“

"We request the central bank to keep the new requirement on consortium loans on hold during this unstable period," added Golchha. 

Through the Monetary Policy for the Fiscal Year 2016/17, the NRB has introduced a provision that requires bank and financial institutions (BFIs) to convert loan from multiple banks above Rs 1 billion into consortium financing by mid-July this year. Earlier, BFIs were required to bring loans above Rs 500 million from multiple banks into consortium loans. The central bank has increased the upper limit of the consortium to Rs 1 billion in line with the demands of the business community. This means that a borrower is not allowed to acquire more than Rs 1 billion from multiple banks. They will have to borrow the money from a consortium of bank and financial institutions.

BFIs failing to bring such loans under the consortium by mid-July will have to set aside certain amount as loan loss provisioning. 

However, bankers have reservation over such demands. Nepal Bankers Association (NBA), the umbrella organization of commercial banks, has even expressed dissatisfaction last year over the decision of the central bank to increase the limit for consortium financing. 

Though the leaders of business community want to scrap mandatory consortium loan requirement altogether, bankers say that the rule controls duplication and over-utilization of loans on a single borrower. 

However, the main reason behind such dispute between the banking and business leaders over the issue of consortium financing is the interest rate. While corporate and business firms can negotiate on lending rates if they are allowed to go to multiple banks, consortium financing means that they will have to borrow on a rate fixed by a group of BFIs. 

"Not only the consortium financing allows BFIs to impose interest rate cartel and increase borrowing cost for business firms and industries, the process of BFIs coming to a group and taking decision on loans and interest rates could become lengthier and time consuming," Anal Raj Bhattarai, a member of national council at the Confederation of Nepalese Industries (CNI), told Republica. "Instead of fixing the limit itself, the central bank should allow the banks to decide whether to go for consortium financing based on its risk appetite and capacity," Bhattarai, who is also a former banking executive, told Republica. 

Bankers, however, have a different take on the issue. Gyanendra Dhungana, the vice president of NBA, said that the practice of bringing such credits under consortium financing helps to curb various anomalies in corporate borrowing like misuse of credit, bargaining of lending rates by big borrowers, duplication of lending and over-financing to a single borrower. 

"Such requirement helps to keep track on the loans and control unnecessary utilization of loans," Bhuvan Dahal, the CEO of Sanima Bank Ltd, said. 

As per the new rule, an estimated Rs 50 billion will come under consortium loans from multiple banking practices by mid-July. 

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