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January, 2005 |
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Sectoral |
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CONSORTIUM VS. MULTIPLE BANKING
The borrowers, particularly the big ones, are
nowadays a very happy lot as the bankers run after them offering cheap
finance. This has given birth to the practice of multiple banking—a
situation when one borrower is banking with many banks. This should have
been governed under the concept of consortium financing. Under consortium financing, several banks (or
financial institutions) finance a single borrower with common appraisal,
common documentation, joint supervision and follow-up exercises, but in
multiple banking, different banks provide finance and different banking
facilities to a single borrower without having a common arrangement and
understanding between the lenders. The practice of multiple banking has
increased tremendously during the last four-five years in Nepal. This is due
to the increasing competition and the bankers desire to grow in a short span
of time.
The practice of multiple banking is mainly in
the area of opening Letter of Credit and Trust Receipt Loans. The primary
security for these transactions are the borrowers’ current assets as these
are working capital financing. If there is multiple banking, it is very
difficult to segregate the current assets when the bankers have to exercise
their lien on the security after the borrower fails to honour the debt
obligations. Banks are involved in multiple banking
practices knowingly as well as unknowingly. The limit facilities taken for
one unit under a group of firms are used for another unit which is borrowing
from some other financial institutions also. In some cases, the customer
hides the information about from other banks while sometimes the bankers are
not regular in reporting to the Credit Information Bureau (CIB) about the
ad-hoc (temporary) facilities provided by them to the borrowers, though they
seek reports from the CIB before granting finance. In most cases, bankers are involved in
multiple banking practices knowingly because of the temptation of getting
big borrowers into their fold. This tendency has increased over the last
four-five years as the competition among the bankers has increased and
opportunities for new business is shrinking. The bankers are using their
marketing skills to snatch the business of other banks by offering lower
rates and promising other services. This practice is not only prevalent in
the Kathmandu valley but also, in other major towns like Birganj, Biratnagar,
Butwal, Pokhara etc. Compared to established banks, the up-coming and new
banks are more aggressive in multiple banking. The business community has been advocating
that the consortium financing creates hindrance for the borrower when they
need urgent funding. So they definitely prefer multiple banking over
consortium financing. In multiple banking, however, the banks’ control
over the borrower will be less and chances of over financing are very high.
The bankers will not know the exact exposure of the borrower as it is being
financed by different lenders. The financial leverage will be on the higher
side and debt-servicing capacity of the borrower will be jeopardised due to
easy access to the fund through multiple banking. Despite being an
economically viable project, the venture may flounder due to over-financing.
This practice creates the chances of over-trading and may promote hoarding
thus leading to artificial shortages in the market. In multiple banking, the
funds are available at lower interest rates, which encourages speculation
and there will be chances of fund diversion. The precise figure of funds
out-flowed from the banking system through multiple banking practices is
very difficult to ascertain but it can be said that a handsome quantum is
being regularly enjoyed by the borrowers in this way. If the problem is not
realised by neo-bankers and they keep on feeling happy about showing a good
performance in their financial statements with the help of this malpractice,
the banking industry may have to face a great problem in the near future. Realising the above problem, some of the
banks have recently started a practice of paripassu charge over current
assets. The effort is in vain as the business community is in the position
to dictate terms as they have the option to go to other banks. This calls
for a cooperation among banks before the problem gets out of hand. Nepal Rastra Bank, the apex body to
regularise the country’s monetary system, has been regularly giving
instructions and issuing circulars for curbing different problems in the
banking system and regularising the economy. Continuing this practice,
recently NRB issued a circular regarding consortium financing, which has
defined consortium financing as loans and facilities provided to any
customer, firm, company or project on the basis of mutual understanding by
two or more banks under an agreement. It strictly prohibits lending to the
borrower without prior consent from the consortium group and it even
prohibits the borrower from opening an account with other banks without the
approval of the consortium members. Though the basic intention of this
circular is to regularise existing practice of consortium financing and to
encourage consortium financing instead of multiple banking, it doesn’t
directly prohibit banks from practising multiple banking. In such a
scenario, the regulatory body is expected to make a timely intervention to
address this problem. If corrective action is not being taken by the
regulatory body and it remains complacent by saying ‘the commercial banks
should take a decision as per the prudential banking norms,’ it may lead
to great disaster in the country’s banking system very soon. By JC |
Send your feedback to the editor: bizline@mos.com.np |
