The Credit Information Bureau (CIB) is soon setting up a separate unit to keep record of various movable assets, like shares and tradable goods, pledged as collateral to obtain loans from banks and financial institutions.
The move comes after a growing number of borrowers were found pawning the same movable asset to get credit from various institutions, raising chances of banking institutions ending up high and dry in case the borrower goes bankrupt.
“We have already filed an application at the Ministry of Finance (MoF) to set up the unit, and we are expecting a positive response soon,” said CEO of CIB Anil Chandra Adhikari.
The MoF has confirmed receipt of the application. “We have taken the request seriously and are considering allowing the CIB to establish the unit soon,” MoF joint secretary Krishna Prasad Devkota said.
The government had floated the idea of establishing such a unit after the endorsement of the Secured Transaction Act in 2006.
The Act allows the government to establish a Secured Transactions Registration Office. But until such an office is set up, the Act also allows the government to designate any office to perform all the functions of the office.
Based on this provision, the government, around three years back, had decided to allow the CIB to execute works of the Secured Transactions Registration Office. At that time the MoF had also signed an agreement with the CIB and had promised to extend a fund of around $350,000 from the World Bank’s Financial Sector Restructuring Project to set up the office. But after the World Bank terminated the project, the decision to establish the unit has been put on hold.
“Over the years, we have been able to collect enough funds to set up the office on our own. The fund that we now have is enough to purchase the software and build other infrastructure,” CIB CEO Adhikari said, adding, “All we need now is MoF’s approval.”
Once the unit comes into operation it will keep records of every movable asset pledged as collateral to obtain loans from every bank and financial institution. Such movable assets include shares and other securities, inventory of goods like machinery parts or processed food products, and even livestock.
“It’s time we keep record of these assets, as there is no centralised system to keep track of such collateral, whereas records of immovable assets like land used as
collateral are kept by various land reform offices,” Adhikari said. “We are sure the information that we collect will be beneficial to banking institutions while extending loans against movable assets.”
One of the reasons the CIB is taking this initiative is to prevent duplication of collateral.
Although there is no official data on credit extended on the back of movable assets, it is said many borrowers are pawning the same movable assets to obtain loans from multiple banking institutions.
This means a wholesaler may have pawned certain boxes of instant noodles to obtain a loan from one banking institution. The same person may have again pledged the same goods as collateral to obtain a loan from another institution. And in case the wholesaler sells these products, the retailer who bought those goods may have again pledged the same goods as collateral to obtain loan from another institution.
Such a scenario may not create a problem if borrowers are able to repay debts on time. But if they go bankrupt, the law gives preference to the first banking institution to lay claim to those goods, and auction them to recover the debt. This means the second and third lenders may end up losing money as they can only lay claim to whatever has been left from the auction conducted by the first institution.
CEO of BoK Ajay Shrestha said, “We appreciate the cooperation being extended by the government in establishment of the unit, but if we cannot empower it and provide it some autonomy, it may fail to yield desired results.”
source: the himalayan times,22 jan 2014
LINK
The move comes after a growing number of borrowers were found pawning the same movable asset to get credit from various institutions, raising chances of banking institutions ending up high and dry in case the borrower goes bankrupt.
“We have already filed an application at the Ministry of Finance (MoF) to set up the unit, and we are expecting a positive response soon,” said CEO of CIB Anil Chandra Adhikari.
The MoF has confirmed receipt of the application. “We have taken the request seriously and are considering allowing the CIB to establish the unit soon,” MoF joint secretary Krishna Prasad Devkota said.
The government had floated the idea of establishing such a unit after the endorsement of the Secured Transaction Act in 2006.
The Act allows the government to establish a Secured Transactions Registration Office. But until such an office is set up, the Act also allows the government to designate any office to perform all the functions of the office.
Based on this provision, the government, around three years back, had decided to allow the CIB to execute works of the Secured Transactions Registration Office. At that time the MoF had also signed an agreement with the CIB and had promised to extend a fund of around $350,000 from the World Bank’s Financial Sector Restructuring Project to set up the office. But after the World Bank terminated the project, the decision to establish the unit has been put on hold.
“Over the years, we have been able to collect enough funds to set up the office on our own. The fund that we now have is enough to purchase the software and build other infrastructure,” CIB CEO Adhikari said, adding, “All we need now is MoF’s approval.”
Once the unit comes into operation it will keep records of every movable asset pledged as collateral to obtain loans from every bank and financial institution. Such movable assets include shares and other securities, inventory of goods like machinery parts or processed food products, and even livestock.
“It’s time we keep record of these assets, as there is no centralised system to keep track of such collateral, whereas records of immovable assets like land used as
collateral are kept by various land reform offices,” Adhikari said. “We are sure the information that we collect will be beneficial to banking institutions while extending loans against movable assets.”
One of the reasons the CIB is taking this initiative is to prevent duplication of collateral.
Although there is no official data on credit extended on the back of movable assets, it is said many borrowers are pawning the same movable assets to obtain loans from multiple banking institutions.
This means a wholesaler may have pawned certain boxes of instant noodles to obtain a loan from one banking institution. The same person may have again pledged the same goods as collateral to obtain a loan from another institution. And in case the wholesaler sells these products, the retailer who bought those goods may have again pledged the same goods as collateral to obtain loan from another institution.
Such a scenario may not create a problem if borrowers are able to repay debts on time. But if they go bankrupt, the law gives preference to the first banking institution to lay claim to those goods, and auction them to recover the debt. This means the second and third lenders may end up losing money as they can only lay claim to whatever has been left from the auction conducted by the first institution.
CEO of BoK Ajay Shrestha said, “We appreciate the cooperation being extended by the government in establishment of the unit, but if we cannot empower it and provide it some autonomy, it may fail to yield desired results.”
source: the himalayan times,22 jan 2014
LINK
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