Default risks discouraging banks from increasing SME loans

Published On: December 7, 2016 09:58 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Dec 7: Bankers have said that bank and financial institutions (BFIs) are eager to provide credit to any small and medium enterprises (SMEs) if there is reasonable return and risk in their investment.  

While SMEs is a prospective market for the BFIs at a time of stiff competition on banking industry, they say that there has not been much demand for loans from entrepreneurs who have 'viable' project and business ideas. 

Speaking at an interaction organized by the Ministry of Industry with bankers on Tuesday, the bankers also advised the government to carry out massive enterprise development trainings across the country for promoting entrepreneurship.  

The ministry organized the interaction in the wake of growing frustrations among entrepreneurs who say that BFIs are reluctant to float loans to them citing lack of collateral or viable business project. 

"We are eager to float loan to SMEs as we need to find new market for oursevles. However, the role of banks in a business is secondary. Entrepreneurs should first come up with their business proposals on which they want financing," Kumar Lamsal, CEO of Janata Bank Ltd, said in the interaction. "Banks are ready to extend even micro credits to the SMEs if there is reasonable risk and return," he added. 

Lending in the SME segment by BFIs is marginal compared to what they have been extending in other sectors like real estate, margin lending and trading. Commercial banks have extended a total of Rs 36.81 billion of loans in the SME segment as of first quarter of the Fiscal Year 2016/17, which accounts for only 2.5 percent of their total credit flow.
They have exposure of 14.9 percent on real estate and 2.2 percent on margin lending in the review period.

Bankers, however, say that a high risk of loan defaults on SMEs has been discouraging them from further expanding their credit portfolio in this segment. "Banks are reluctant to float credit in SME segment because they are worried about possible default in this sector. And there is tendency of giving protection to these defaulters," Lila Prakash Sitaula, the CEO of state-owned Agricultural Development Bank Ltd, said, referring to political protection that many loan defaulters enjoy.

At the program, Umesh Raj Newa, manager, Small Business Financial Services, Laxmi Bank Ltd, shared how their initial encouragement while coming up with a specialized SMEs loan scheme entitled 'Laxmi Uddhyami Karja' later turned into a discouraging experience for them. According to Newa, the bank floated a total of Rs 350 million, 0.6 percent of their total lending, to nearly 900 small and medium entrepreneurs as part of project-based financing of up to Rs 1 million.

"Initially, our initiative to finance project without any collateral drew applause from various stakeholders. However, the recovery of loans has not been much encouraging now. There are cases where such borrowers have been deviating from the financial discipline and stopped servicing repayment of the loans," said Newa. 

The non-performing loan (NPL) of such scheme stands at 25 percent, compared to the bank's overall NPL of less than 1 percent. 

Many bankers also suggested that the government create an enabling environment for developing SMEs sector so that BFIs can float loans without any worry. "Financing the SMEs should not be dealt in isolation. The entire value chain system should be made effective where an entrepreneur can have access to roads, markets and all the things to succeed," Upendra Paudyal, former president of Nepal Bankers' Association, said.

Industry Minister for creating a fund to compensate for SME loan defaults
Minister for Industry Nabindra Raj Joshi has said that the government was ready to create a fund which can compensate bank and financial institutions (BFIs) for the loss that they face in SME lending. 

Following complaints from the bankers that the default risk in the SMEs lending has been holding them to expand loans in this sector, Joshi said that setting up such fund would enable BFIs to lend small and micro enterprises without worrying much about default risks. "Once the fund is set up, there will be an environment where banks can provide loans confidently," he said at an interaction with bankers held in the capital on Tuesday. 

The Ministry has also decided to form a taskforce comprising representatives from bankers' associations, Nepal Rastra Bank, Ministry of Finance and Ministry of Industry to work out a plan for promote SMEs financing and entrepreneurship.  

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