Kathmandu. Although business activity has slowed down in most sectors of the economy, the credit investment of commercial banks has increased unnaturally.
Current fiscal year 2083. From July to September 2018, commercial banks have issued new loans worth Rs 146 billion. Of this, loans worth Rs 85 billion have been extended in the month of September alone. 58 percent of the total credit expansion in the three months has been added in September alone.
Due to the increase in import and business activities due to Dashain and Tihar, it is considered natural that there will be some increase in the demand for credit of the banks. However, the loans going for the festivals are usually of a short-term nature. In the recent past, the loans issued by the banks have been seen to be long-term, which has raised questions about its real utility.
At a time when new industries have not been established, the production capacity of the old industries has not been expanded, and the existing industries are also reducing the current capital loan, the increase in the loan investment of the banks has increased the suspicion that new loans are being issued to manage the old debt within the financial system. The Nepal Rastra Bank has also suspected that the new loan may be being used to pay the principal and interest of the old loan.
In the banking sector, there has been a demand for loans for the purchase of hotels, hydropower, oil refineries, houses and vehicles in recent times. However, the demand in these sectors does not seem to fully explain the large credit expansion in the short term.
Although there is a demand for loans in hotels and hydropower projects, it is a time when construction and expansion work slows down due to the rainy season and big festivals. Therefore, the demand for loans in these sectors is not in a situation to flow in large quantities immediately. Investments in small oil processing plants do not consume loans worth billions of rupees. Similarly, loans for the purchase of houses and vehicles are usually in the size of lakhs and crores of rupees.
This has raised the question of whether the large amount of loans that have been extended in recent times have gone to real new investments or have been used for the purpose of regularizing the loan by paying the principal and interest of the old loan. Evergreening is the practice of regularizing problematic loans in the banking sector through new loans. Such a practice can hide the real risk to the credit quality of the bank.
Experts analyze that banks are not following adequate credit discipline in loan expansion due to weak regulatory oversight. According to them, the increase in credit flow when the industry is not running is not an indication of the expansion of investment in the productive sector. They believe that the regulator has not been able to maintain adequate oversight in the system of credit control and supervision while facilitating credit expansion.
Earlier, after the Rastra Bank tightened the current capital loan, the loan investment of the banks was decreasing. The demand for loans in industries and businesses had further decreased due to the weak aggregate demand. Now various industries are reducing their current capital loan limits. Even the Agricultural Inputs Company and Salt Trading Corporation, which used to take loans of billions of rupees in the past, have now kept the loan account zero. Large information technology and telecommunication companies have also reduced the loans taken from banks.
In the banking sector, old loans are repaid by Rs 2 to Rs 3 trillion every quarter. In such a situation, it is a normal process to repay the old loan and replace it with a new loan. However, banking sector experts say that it is doubtful to expand the loan gap by filling the gap of the loan paid at a time when the capacity of the industry is decreasing and business activity is weak.
On the other hand, competition among banks to attract good borrowers has also increased. Out of the 20 commercial banks in operation, about a dozen have increased their loan investment, while the credit of the rest of the banks has decreased. Other banks are attracting customers of banks that have reduced loans by giving loans at lower interest rates. Some banks have adopted a strategy to attract customers by providing loans at the base rate. When loans are transferred from one bank to another, the credit of the entire banking system does not expand. However, the increase in loans by an additional Rs 146 billion apart from such transfers has raised questions about the purpose of new loans.
Currently, the NRB has given special regulatory relief to construction entrepreneurs and businesses that were damaged during the Genji agitation. Such facilities are not available in other sectors. However, former bankers say that the NRB’s supervision is weak and the practice of regulating loans by taking advantage of the laxity in the regulatory system has become easy.
According to them, both borrowers and bankers have to face fear of legal and administrative action due to problems in loan recovery.
