Thursday, March 11, 2010

Margin lending to Promoters of Banks –Bad guys

A government study has reckoned that promoters of commercial banks themselves are the biggest borrowers of margin lending -- loans against collaterals of shares they own -- and it is the root cause of almost all the ills of Nepal´s financial system.


The study conducted jointly by a number of government agencies, including the central bank, found that promoters of all private banks but one, Standard Chartered Bank, have pledged shares as collaterals to other banks to take loans. Clause 48 of Act to Banks and Financial Institutions 2005 bars banks and financial institutions to lend against their own shares.


According to the study, promoters of Nepal Credit and Commerce Bank has pledged the highest almost 90 percent of the shares to take loans from other banks, mostly from the banks owned by the same promoters´ group. Twenty promoters of the bank have pledged over 6.4 million shares as security to lending bank out of total 7.17 million shares held by them.


"It is not illegal, but it is wracking the financial system because it instigates borrowers to manipulate the share market to raise the prices of shares artificially so that they can borrow higher amount or at least cover the borrowed amount," said a government official. The study has found the root cause of the unnatural share price movements that Nepal´s share market witnessed some months back, he added.


Similarly, promoters of Kist Bank -- the newest financial institution to enter the 26-member commercial bank group -- have pledged 54.5 percent of the shares they own to take loans. Of the 120 million units of shares that the promoters of the bank possess, 45 promoters have pledged 6.54 million shares for the purpose of borrowing.


A close look over the linkage of pledged shares and investments made afterward reveals that most of the promoters used the borrowed money either to a open a new financial institution or upgrade the existing ones, said one of the officers involved in the study. "In principle, promoters planning to open financial institutions should make required investments from own and other sources, at least not by borrowing from the banks´ resources, which should be invested in productive sector to boost economic activities," the official added.


Similarly, NIC Bank ranks third in terms of the ratio of shares that have been pledged by its promoters to take loans. According to the study, 51.47 percent of the shares have been pledged, Machhapuchhre Bank comes fourth with 49.64 percent of the promoters-owned shares pledged to get loans.


There were intense discussions on the issue recently among the regulating agencies of financial system and there was a strong call for policy changes to curb such practices, said the official. "However, the beneficiaries ganged up and successfully foiled the attempt," the official added.