KATHMANDU, Feb 8: Commercial banks disbursed a whopping Rs 19 billion in loans in the second week of January, raising suspicions that the banks might have tapped the relaxation that Nepal Rastra Bank (NRB) recently provided to bank and financial institutions (BFIs) to capitalize a huge interest amount from the borrowers hit by the recent turmoil.
While 30 commercial banks were floating an average of around Rs 3 billion in loans in the earlier weeks, their credit disbursement jumped suddenly by Rs 19 billion in the second week of January to Rs 1,175 billion.
The loan growth came at a time when BFIs struggling to increase lending due to lack of demand for credits from borrowers. Devastating earthquakes of April and May, Tarai unrest and Indian blockade have hit loan disbursement of BFIs, as investors and private sector were scared to borrow amid worsening economic and political situation of the country.
"I was surprised to see loans taking a jump by Rs 19 billion in a week while their average weekly loan flow is just around Rs 3 billon. Loans of some banks might have increased in real terms, but such a huge jump is due to interest capitalization allowed by the central bank on the eve of the second quarter of the current fiscal year," a banker told Republica, requesting anonymity.
Data compiled by Nepal Bankers Association (NBA) also shows that sudden surge of the loan growth in the last week of the second quarter -- the period when borrowers have to repay their quarterly installment -- eventually came down to around Rs 2 billion per week in the subsequent weeks. Data shows loan went up by Rs 4 billion in the first week of January, Rs 19 billion in the second week and Rs 2 billion each in third and fourth week. The banks floated a total of Rs 1,179 billion as at January end.
"This is appalling for the banking industry to capitalize such a huge amount of interest. It is like saying I give you loan and again I am giving you money to pay my interest. I will book this amounts both on my loan portfolio as well as in interest income,” the banker said, adding, “This is a very bad practice and does not bode well to the balance sheets of the bank."
Many analysts say that the surge in loan fund also signals that there could be huge debts of banks at risk of default. "This shows that loans that accrued around Rs 15 billion of interest could be at risk due to recent turmoil," an official of Nepal Rastra Bank (NRB) told Republica, preferring anonymity because he is not authorized to speak to media.
Among other relaxations, the central bank had said that the BFIs can capitalize interest and recognize it under interest income while restructuring and rescheduling loans of borrowers affected by 'unfavorable circumstances '. For example, if a bank had floated Rs 100 to a borrower and the borrower is required to pay Rs 5 as interest in the second quarter, the bank will now recognize Rs 5 as loan as well as income interest. However, such interest income should be kept in a separate fund until the loans are repaid.
Nepal Bankers Association (NBA) Vice-president Anil Keshary Shah, however, told Republica that the growth of loans is the outcome of a combination of relaxation offered by the central bank and real credit disbursement. "The banks have capitalized interest rates as per the central bank relaxations. There is also an uptake in the loans of the banks in recent days as there are signs of current turmoil coming to an end while many are reaping the benefit of cheaper borrowing cost due to interest rate drop,” Shah, who is also the CEO of Mega Bank, added.
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