May 19: Banks and Financial Institutions (BFIs) are utilising loan swap provision to show decrease in their non-banking assets.  Loan swap is a provision where customers can transfer their loans to another bank and other banks can transfer customers’ loans to own banks as well.  “Many use the technique to postpone loan payment” say banking sector related individuals.

However, problems in recovery of such loans lead to increase in non-banking assets of the banks. Among 81 BFIs that have published their third quarter financial reports of current FY till Wednesday, only 29 of them have non-banking assets. Currently, these BFIs have Rs 1.8 billion non-banking assets. Such loans have decreased to zero in four BFIs while six BFIs have shown new non-banking assets. In some BFIs, such loans have increased qualitatively.

BFIs have been fully utilising the loan swap authority given by NRB to transfer potential bad debt to each another’s bank in mutual consent and be secure from bad debt provision. “Let me give you an example,” says a banker, “Before some time, NRB has asked a bank to keep Rs 150 million loan provision. However, another bank agreed immediately and gave a customer loan of Rs 200 million in same collateral.”

Although, NRB has provided facility of loan swap, it can be exercised only once in any loan. “Therefore, there is no possibility for any bank to accept potential bad loan in consent,” says Trilochan Pangeni, Spokesperson and Executive Director of NRB. Even though, banks have been taking advantage of procedural holes in the policy. “As strategically such loans can be transfer only once, banks, in mutual understanding, shows recovery of old loan and issuance of new loan, which is difficult to regulate,” says the banker.

This technique helps the former institution to secure from bad debt provision while new institution gets opportunity to earn additional interest income.  Sources say that this kind of equation is formed in a bid to earn temporary benefits from taking risks, good relation between bankers and businessmen or due to investment of businessmen in BFIs. As loan advancing strategies and limitation on valuation differs with banks, customers seeking out for new institutions that will give more loan amount are in practice.  

“Even if banks adopt indirect technique of showing new loans, the new loans have to be paid one day. So there is lesser possibility of bankers taking such a high risks,” says Pangeni. Although, with the increase in loan payment period, price of properties (house/land) also keep growing. Thus most bankers take these ‘advance’ risk,” informs the sources. Meanwhile, non-banking assets of merged entities have increased due to collateral of bad loans of former institution.