FAQs - Credit
What is credit?
Credit as a term is derived from the word credibility which means trust worthiness or the reliability of the one who gets credit. In banking terminology Credit means various forms of loans that any bank provides to its client. Any forms of Loan, Debt, Lending, Guarantee, etc are referred as credit facilities.
What are the categories of credit normally seen in Nepalese context?
Categorization of credit largely depends on the ways a bank defines its credit portfolio mix. In general we can define it on four major blocks:
Which type of credit block suits me the most?
- Corporate/Organization or Group lending
The size of the credit is bigger in nature, generally the loan is provided to different units of a single group or organization. For example- The credit facilities availed by different firms of a single organization is booked under a single umbrella and sub allocated to the associated units. In such credit facilities if a single bank cannot meet the entire need, credit facilities can be provided through multiple banks or a consortium lending. This diversifies risk and share expertise and mutual benefits.
- Business lending or medium size lending.
Generally the size of the loan is smaller than the corporate lending. A single unit or few small associated units are given credit facilities under such lending. The common name for such finances is also called Financing for Small and Middle Size Enterprises.
- Retail Banking or Consumer lending
This is a very common and popular lending around the world. Loans facilities like, vehicle loan, housing loan, education loan, marriage loan, festivity loan, etc are called retail or consumer lending. Such loans are payable on certain period of time on the installment forms. The installments are generally called Equated Monthly Installments (EMI) or Equated Quarterly Installments (EQI). A fixed sum has to be paid every month or a quarter which includes principal and interest repayments of the loan. The installments for the loans are generally derived from a part of the customers' net disposable income which at most cases are below 50%.
- Micro finance
These are very small amount of loans that are given to the consumers to start a small business which provides self employment and income generating source. The lending concept has slowly entered the Nepalese market. The focus of such lending in Nepal is mostly found in the rural areas. Rather than commercial banks and finance companies, NGO, INGO and some other institutions are actively involved in micro financing.
The nature of your business and credit needs determines the category you might fall in, and it could be any one of the blocks stated above. Credit facilities will be recommended by banks as per your need assessment and the volume of business you carry.
What do I need to do avail credit from the bank?
First of all you need to decide what kind of loan you intend to take. What is the purpose of the loan? Like Is it to build a house? Or to buy a vehicle or expand the business or provide financial support to the subsidiary unit, create working assets or you need sum of money to invest in a project, and this in turn determines the type of credit you require. On deciding on the same, the loan will be disbursed to the stated purpose after the necessary credit analysis and submission of other necessary documents related to your business.
Why can't the Banks lend easily and why does it have to ask for lots of other things even after providing more than enough security as collateral ?
The value of security held / proposed to the Bank as security does not guarantee the safety of an exposure. Security is only a second way out and should not be considered as primary source of repayment. Credit is never justified only on the basis of the value of security held. Nevertheless, it is prudent to take security even though the credit assessment may indicate that the credit risk is acceptable to the Bank even on unsecured basis.
We have seen too many projects failure in the country, which must have been accepted by the Banks in the past simply because they appeared to be fully secured.
Besides this, the Banks would also like to know the purpose for which a loan is required and must be satisfied that the particular purpose is legitimate for the type of the loan proposed. This is why the Banks ask for other things relating to financial and other business information.
Why didn't the Banks finance upto 100% of the project cost ?
To be reasonably satisfied that the promoters have enough commitment towards the project, the Banks do not finance upto 100% of the project cost and ask for the promoter's commitment in the form of equity. The Banks need to be fully satisfied with the fact that the promoters are contributing sufficient money (equity) acceptable to the Bank towards the project.
There had been a tendency in the past in the country that entire project cost been funded through the Bank's loan.
What is a consortium financing ?
Technically, consortium financing is financing a project jointly by two or more banks. Under consortium arrangement, the banks acquire common interests and share the advances and securities on pre-determined proportions.
At times, mainly in the case of larger projects requiring comparatively larger amount of funds in the form of capital investment, a single Bank may not be in a position to finance the project of its own or may feel hesitant in undertaking the risk because of the degree of the risk involved. In such case, the banks form a consortium to jointly participate in financing.
Q. I'm planning to construct a house on a plot of land located at Battisputali. But the property is accessible by a four feet wide road. Will any bank accept the property as collateral? - Bhim Lal Shrestha, Battisputali
A. In order for a bank to mortgage a fixed property as collateral for coverage of a loan, the property must have a motorable access road.
Q. I am thinking of obtaining an education loan from a bank to complete my further studies. Please advise on the process. - Mokshyata Joshi, New Baneshwor
A. A student planning to go for further studies, first of all, must be specific on the course that he/she is pursuing. Besides the course that a student is undertaking, most of the banks analyze the income of the individuals/businesses that would be sponsoring the student or future income that the student would make after completion of his/her studies. And of course collateral is always mandatory. I would strongly advise an applicant to have clear understanding of the terms and conditions regarding repayment of loan, value of collateral required, applicable interest rate, and other applicable fee and charges.
Q. What are the conditions for availing hire-purchase loan for purchasing a used vehicle?
- Prashant Shrestha, Baneshwor
A. Unlike in the case of financing of new vehicles where banks provide loans upto 80% of the value of the vehicle, refinancing of used vehicles in most cases, is done upto 40-50% of the value of the vehicle. The basis value of the used vehicle is generally calculated by an appointed valuer of the bank. Incase of refinancing of vehicle from a different bank, vehicle loan upto the loan outstanding at the bank is provided in general.
Q. What are the terms of re-payment under education loan? In other words, from when does the repayment of principal start under education loan?
Puja Pradhan- Jawalakhel
Regarding repayment of principal amount under education loan, different banks have different policies. In most of the cases, parents/sponsors of the student are required to make payment of principal the following month from the date disbursement. Some banks provide moratorium period for the repayment of the principal amount till the student completes his/her studies and starts earning on his/her own.
Q. How are loan disbursements made in case of housing loans obtained for construction of house?
- Sabin Manandhar, New Road
A. While loan is disbursed in full in case of purchase financing, banks normally make disbursements in parts in the case of financing for construction of a house. The total project cost is segregated in four to five stages based on the nature of construction, for eg. cost for completion level foundation level, then for completion cost superstructure, and then for completion of painting, sanitation, electrification and so. Unless the next previous stage is complete, disbursement for the next stage is not made.