Your bank has just turned seven. How does it feel?
Over the years we have crossed many hurdles, which, in fact, have made us more mature.
Could you please be a little more specific?
Over the years we faced problems of both liquidity crisis and excess liquidity. We also had to raise paid-up capital to Rs 2 billion within this timeframe. We also faced problems that emanated from tight capital adequacy situation, which forced us to restrict lending. All these incidents took place when the country´s economy was growing at a relatively slower pace and investment climate was not suitable for doing business. Now we have a credit portfolio of around Rs 18 billion and have mobilized deposits of around Rs 21.5 billion.
You have just published third quarter results. Profit has gone up. But amount allocated for possible loan loss has also gone up.
Increased loan loss provisioning does not affect the bank´s financial health as long as debts are recovered in time. This allotted amount, in fact, will help us to raise our revenue in future.
Photo: Keshab Thoker
What about base rate? It has also gone up.
At present no bank is facing liquidity related problem. Ctitizens Bank, for instance, has maintained liquidity ratio of 27 percent. But at the same time credit to core capital cum deposit (CCD) ratio is at 77 percent (as against central bank´s ceiling of 80 percent). The situation is same at many banks, which means they are under pressure to maintain CCD ratio despite having cash to extend loans. To maintain CCD ratio at 80 percent, banks either have to raise deposits or restrict lending. Banks are currently focusing on increasing deposits, which has raised their cost of fund. This, in turn, has raised base rate (based on which lending rates are fixed).
How realistic are base rates published by banks?
The liquidity situation impacts cost of fund. Whenever liquidity is at comfortable level, banks reduce deposit rates and when there is liquidity crunch they raise deposit rates. This directly impacts lending rates and ultimately base rates, albeit it is intention of every bank to maximize efficiency and keep cost of fund at a low level.
But are banks really fixing lending rates based on base rates?
If you do not move according to the market trend, you cannot retain good clients. If your lending rates are higher than that of you contemporaries, then you won´t be able to attract low-risk customers. Banks that do not understand this basic principle will have to live with high-risk customers.
Then why is the central bank indirectly complaining about high lending rates, in spite of low deposit rates?
You must have noticed that some banks have fixed deposit rates at as low as two percent while others have fixed this rate at as high as eight percent. If a depositor chooses a bank that is offering two-percent interest on cash park -- despite being aware about presence of banks that are offering higher rates -- then we have to respect the customer´s decision. But those banks offering low deposit rates are also offering loans at cheaper prices, which ultimately benefits borrowers. So I don´t think it is appropriate to complain about high lending or low deposit rates as the market determines everything and those that are not competitive will eventually be pushed out of the industry.
Lately, banks have also witnessed donation drives launched by political parties. What is your take on this issue?
The Nepal Bankers´ Association is very clear on this issue: banks cannot extend donation to political parties. This is because we are using public´s money. Yes, we extend financial support to sporting or mountaineering events and sectors like health and education, but these assistances are linked to business they generate for us. For example, support to health sector depends on contribution made by the sector to our business. This is the same with other sectors. But political parties are not willing to buy this logic. They only see us making profit and demand for money from us. In this regard, Nepal Rastra Bank should come up with a clear policy on whether banks and financial institutions can donate funds to political parties. If the response is affirmative then it should also fix a ceiling on donations and make such contributions tax-free. At the same time we have also been asking the government to devise a mechanism that can channel a portion of huge amount of taxes that we pay to national-level political parties planning to hold conventions or participate in election.
How have they responded?
Discussions are still going on. What we want is end to the practice of raising funds using threat and violence. So policies should be made to address these problems, as they erupt whenever political parties are short of cash.
How has the banking sector viewed latest political developments and installment of a new government?
This government has been formed to create a favorable environment to hold free and fair election and maintain security. Till the time of the election, the government should also focus on promoting good governance. This means public service delivery system should be effective, corruption level should go down and red tape at different government bodies should be cut down. So an example has to be to set by the time the incumbent government hands over the power to an elected government.
Lastly, is Citizens Bank launching any new product?
We are planning to introduce a scheme called ´One Zone, One Product´ under which specialized banking service would be offered to one sector in every zone. The highlight of this scheme is easy lending facility although lending rates may differ based on risk.
Related story
Lending slows as banks focus on recovery of loans at fiscal yea...
