“The new trend has surfaced mainly as bankers feel providing inter-bank loans to development banks and financial institutions is a risky business,” a banker told Republica. [break]
The bankers have chosen to play safe mainly after a few banks that provided some Rs 140 million to People´s Finance and Gorkha Development Bank (GDB) faced problems in recovering their loans.
Inter-bank loans are short term loans provided to fulfill immediate liability and obligations of needy financial institutions. In the past, banks and financial institutions were issuing such loans without any collateral. However, the situation has changed after a few banks not only faced problems in recovering Rs 30 million issued to People´s Finance and Rs 110 million issued to GDB, but were even required to provision for the possible loss of those loans.
“The inter-bank transactions among commercial banks are still free of collateral as the level of trust is still intact.
However, with financial institutions, we are seeking collateral back up of treasury bills, debentures and bonds that they hold for the sake of security,” said Ashoke Rana, president of Nepal Bankers´ Association (NBA).
That is not all. Sources disclosed that the volume of collateral that banks seek varies with the level of trust they exhibit over the given development bank and finance companies.
In case of trusted financial institutions (FI), banks are providing loans up to 120 percent of the collateral they pledge. “In case of doubtful institutions, we provide inter-bank loans worth just 80 percent of the collateral value,” the source said.
Many commercial banks are providing inter-bank lending only against collateral mainly after the Nepal Rastra Bank (NRB) allowed banks to provide such loans against collateral.
The volume of such collateral-based inter-bank transactions has picked up mainly as demand for money suddenly has soared in the market due to festive seasons, said an NRB official. “We anticipate the transactions to jump further during Dashain and Tihar, when demand for money hits the peak,” the official added.
Despite showing low trust, bankers, however, have not raised the rate of inter-bank lending. It presently stands at about 1.5 percent. But as more BFIs are expected to resort to inter-bank borrowing to fulfill the increased demand of money during Dashain festival, bankers anticipate the rate to jump over the next two months.
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