NRB to re-allow dealers to issue car loans

Nepal Rastra Bank (NRB) plans to re-allow auto dealers to lend money to customers to buy their automobiles. Motor sellers had been obtaining wholesale loans from banks and financial institutions and using the cash to issue credit to their clients. A year ago, the central bank stopped them from implementing the financing arrangement. A senior NRB official said they were working on a guideline to permit auto dealers to provide financing to their customers after obtaining a licence from the central bank. “We have planned to introduce the guideline before the Tihar festival,” said the official. NRB relented under pressure from auto dealers, private sector bodies and banks to reinstate the financing facility. The central bank had banned the practice claiming that car buyers were being forced to pay more when they obtained auto loans from the dealers themselves. Under the proposed guideline, firms wishing to provide hire purchase financing will have to register themselves as a hire purchase company and have a paid-up capital of Rs 100 million. “Such companies will be allowed to charge a maximum mark-up of 3 percent on the interest they are paying their banks for the bulk loans,” said the central bank official. As such lending was being made without approval from NRB, it had termed the practice illegal. The NRB Act states that the central bank’s okay is required to carry out any kind of banking activity. NRB will issue a licence to the applicant as per clause 76 of the NRB Act which says that its approval is required to accept deposits or lend money. The clause has also given the central bank the right to set conditions and those willing to carry out banking activities have to accept them. “The interest margin and other necessary conditions will be fixed before issuing a licence,” said the official. While car sellers had been miffed when the central bank stopped them from lending money to their customers, banks said that there was less risk in issuing wholesale loans to dealers than to individual borrowers. Banks have complained that they have to spend more time when dealing with individual borrowers despite the small amount of the loan. Moreover, in case of default, the vehicle they seized from their delinquent borrowers had to be sold at scrap value. However, Anal Bhattarai, chief executive officer of Commerz and Trust Bank, said that banks issuing loans to car buyers directly was a good practice as it contributed to making the hire purchase deal cheaper. According to auto dealers, a majority of automobiles are sold under hire purchase arrangement. In the last fiscal year, 208,483 motor vehicles were registered at the Department of Transport Management. Motorcycles made up the largest number with 175,381 units registered followed by tractors and power tillers and cars, jeeps and vans. A total of 1.55 million vehicles have so far been registered at the Department of Transport Management. NRB relented under pressure from auto dealers, private sector bodies and banks to reinstate the financing facility Nepal Rastra Bank.