Banks unenthusiastic about productive sector loansAccording to bankers, if the government wants banks to inject funds into certain sectors, it should first make them capable of absorbing investment
Despite the policy-provision of Nepal Rastra Bank (NRB) requiring commercial banks to disburse 20 percent of their total credit to productive sectors, lending had reached only 16.52 percent as of mid-August.
The central bank though its monetary policy in July 2013 had asked commercial banks to maintain lending to such sectors at 20 percent by mid-July 2015. However, they have failed to increase their lending as required, and the central bank has been mulling introducing stringent law to penalize banks falling short of the target. Real sectors of the economy like agriculture, industry, infrastructure, small and medium enterprises and services are known as productive sectors.
Although, bankers have officially welcomed the regulator’s move to introduce directed lending to productive sectors, in reality they have done very little to comply with the rule. In fact, bankers say that asking commercial banks to lend in such areas can be counter-productive as they can lose focus in their area.
“Banks automatically lend to the areas that are feasible,” said Upendra Poudel, president of the Nepal Bankers’ Association. “If certain areas are not feasible, then banks cannot lend in those areas. We don’t lend money from our pocket. Instead, we mobilize deposits collected from the general public.” So, we have be very prudent while extending credit to any sector, he added.
According to bankers, if the government wants banks to inject funds into certain sectors, it should first make them capable of absorbing investment. They even warn about a possible systemic risk to the financial system if there is forceful lending to certain sectors. “If banks are forced to lend to certain sectors despite their viability, naturally their lending will be substandard,” said Poudel. “We even have to approve loan proposals that fall below our standards.”
Bankers have warned that the loan portfolios of some banks are already not very healthy. “A large amount of substandard loans will pose a systemic risk to the financial sector,” said Bhuvan Dahal, CEO of Sanima Bank.
NRB, however, doesn’t agree with the opinion of bankers and says that without a growth in the productive sector, the banking industry cannot witness healthy growth in their own business.
According to the regulator, lending to real sectors is essential not only for economic growth but also for the survival of the banking industry. “We have noticed great slackness by banks when it comes to lending to productive sectors,” said a senior NRB official. “Till date, we have not penalized banks for their inability to meet the target set to lend in the real sector. We wanted them to follow the directive on moral grounds.” We are considering mulling stringent laws to penalize banks that fail to increase directed lending by the end of this fiscal year, the source added.
Bankers, on the other hand, said they would rather pay the penalty imposed by the regulator than increase lending to risky areas. “The day will come when banks will accept the regulator’s penalty instead of extending substandard loans,” said a CEO of a leading commercial banks seeking anonymity.
Apart from the mandatory lending of 20 percent to productive sectors, the central bank through this year’s monetary policy has asked banks to increase their lending to agriculture and hydropower to 15 percent from the previously provisioned 12 percent. Currently, according to Dahal, the average lending of commercial banks to these two sectors amounts to around 12 percent, and it will be very difficult to increase it to 15 percent.
Since NRB has listed only two sub-sectors — agriculture and energy — under the heading, commercial banks have very few opportunities to issue loans. “Definitely, banks would like to increase their lending to the agriculture sector,” said Poudel. “But there are obstacles preventing banks from going into this sector. With a large number of youth migrating abroad for employment, there is an acute shortage of human resources in farming.”
There are issues with regard to lending to the hydropower sector too. Even if banks sanction loans for a hydropower project, it will take a lot of time for the actual disbursement when the project reaches the electromechanical phase.
The other major issue is the power purchase agreement (PPA) model adopted by the Nepal Electricity Authority (NEA). Banks will only lend to projects having a ‘take or pay’ model of the PPA with the NEA. Banks are not comfortable lending to projects having a ‘take and pay’ model. Under the ‘take or pay’ model, the NEA has to make
payment even if it fails to buy electricity from the developer while under ‘take and pay’ model, the NEA has to make payment only if it purchases electricity.
The government is ready to adopt a ‘take or pay’ model for projects with a combined capacity of 2,700 MW. However, after crossing this mark, it is planning to adopt the ‘take and pay’ model. Banks are less likely lend to those projects if there is no guarantee that their production will get a proper market.