Editorial»
Consortium financing in need of guidelines
NOV 28 - The practices of consortium finance in Nepal have a history of more than a decade. But even after a long practice, in the absence of clear and specific guidelines on consortium financing, financial institutions are facing hard days. Till today, financial institutions have been participating in consortium with their own judgement and agreement. Neither the Nepal Rastra Bank nor financial institutions have any specific guidelines on consortium so far. With the practices of consortium financing, projects like Gorakhkali Rubber Udhyog, Jyoti Spinning Mills, Tara Gaon Regency, National Hydropower, Manakamana Cable Car, Aarti Strips, and so on came into operation. For a developing country like Nepal, the establishment of huge industries is essential to achieve the much-desired high economic growth, which is only possible through Consortium Financing due to huge funds requirements and the risk involved.
Financing a project by more than one bank or financial institutions is known as consortium financing. In other words, banks or financial institutions engage collectively to finance a project whereby the financial needs of the borrower are fulfilled. Likewise, the banks are also benefited in many ways. Under consortium finance, the capital required for the huge investment can be collected with the involvement of banks and this also helps to spread the risk involved in the project. On the other side, the banking sector can mobilise its deposit to the productive sector and solve the problem of over liquidity.
In the context of Nepal, Nepal Rastra Bank (NRB) directives on single obligor limit also restrict the financial institutions to finance a single borrower over or in access of a limit. This also makes the consortium finance a viable alternative option. In the current provisions of NRB, a bank cannot finance a single institution more than 25 percent of its core capital as fund based and 50 percent as non-fund based.
Today, dozens of Consortium Financed-based projects have been established. Large-scale hotels, airlines, export and locally based products manufacturing industries, hydropower projects, hospitals, educational institutions are some of the prominent industries where consortium financing has been done so far. Almost all the banks from the oldest Nepal Bank Limited to the youngest Siddhartha Bank are involved in consortium finance. An independent study done by an MBA student of Apex College has shown that more than 16 billion rupees (includes the portion of commercial banks only) have been floated as outstanding loan only on consortium as of 16th July this year. The research has also shown that Nepal Bank Limited has the greatest share in consortium. Likewise, the exposures of private sector banks are also big.
Since the economy of the country is deteriorating, obviously there are only a few sectors left for the banks to invest. The new sectors could not have been identified. The research has shown that most of the investments of banks are of similar nature. Out of the total consortium loan of banks, manufacturing (includes cement, leather, liquor, sugar, iron and steel, tobacco etc) sector is the one where huge consortium financing has been done. Likewise, the investment in Hotel industry comes after manufacturing sector. The hotel industries all over the world have been facing their rainy days and Nepal cannot be an exception. Big hotels like Fulbari Resort and Hyatt Regency, which were built under consortium, are facing a tough time and rosy days do not appear in the near future. So the challenge for the bankers is how to make these loan secure. Hydropower sector should definitely be called a new sector where the banks have started financing on consortium. Hydropower sector holds the third largest share in consortium.
With an attempt to establish new projects consortium financing helps the country to uplift its economy by generating employment opportunity within the country, promoting export and thereby substituting import. There is no doubt that Consortium financing can contribute for sustainable development of the country by benefiting different sectors of the economy. However different problems have emerged during the practices. For example, until the completion of the Pari Passu Process Bridge Gap Loan is given to the borrower when the agreement is made to provide consortium loan. Normally collateral is not taken while sanctioning Bridge Gap Loan and in many cases there has been misuse of this loan. Similarly, the problems have been observed in the case of equity participation also.
Even after a decade of practice, investment of more than 16 billion rupees and involvement of all commercial banks of the country the financial institutions are facing lots of challenges in this field due to the absence of guidelines and clear policy matters. The roles of Lead Bank, Agent Bank or the Participating Banks are not still clear in the context of Nepal.
There are not even specific policies stating the number of banks that can be involved, borrower limit, practices to be followed in regard to expenses, rights and responsibilities of the consortium banks, role of central bank, admission of new member bank, norms of consortium etc.
Due to the absence of clear policy, most of the projects financed in Consortium are not doing well. Lacking effective regulations, non-performing assets (NPA) are mounting and the capital is eroding. It has been observed that almost halves of the NPA of the Nepalese financial institutions are related to the consortium projects and recovery of this amount seems almost impossible. Frankly speaking, they are neither serving the interest nor contributing to the economic development
of the country in the present
scenario.
While we lack common guidelines in respect of policy and operational process, on the other side projects financed in consortium are not doing well.
Therefore, it is high time for NRB to come up with suitable procedural guidelines to develop and regulate consortium financing to boost up the confidence of Financial Institutions so as to encourage them to finance projects in consortium for the overall economic development of the country. NRB’s failure on doing so may invite a serious problem related to this matter in the near future.
Considering the above issues HMG/N, especially Nepal Rastra Bank, has to constitute the long awaited ‘Consortium Guidelines’ with the involvement of stakeholders like government, bankers and concerned specialists etc. otherwise the whole economy may run into a serious trouble with huge financing such as consortium.Posted on: 2003-11-27 10:42
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