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Liquidity crunch has deepened again. What triggered it?
The latest crisis has to do with the lack of government spending. Currently, some Rs 21 billion is stuck in the national treasury. It also has to do with the approaching of mid-January, when banks must clear 40 percent of their total tax liabilities. Such liabilities stand close to Rs 20 billion. Apart from that, new steps like: NRB monitoring the banking transactions worth Rs 1 million and above and imposition of income disclosure and capital gain tax on larger property transaction has negatively hit market psychology. The latest categorization of tax evasion as a case of money laundering has worsened the situation. All these factors have prevented the inflow of capital in the formal system and bloated the informal market.
How has that affected the credit flow of the banks?
It has substantially lowered the banks capacity to invest. While there is little credit demand in the realty sector, latest hike in duty and interest rate has dragged down auto loans demand. There is some demand in the small and medium enterprises. But the demand for large scale investment is simply not there. It will drag down both profit and overall profitability of the banks.
Of late borrowers are complaining that banks have increased lending rates unjustifiably. How do you respond to it?
It is true that lending rates have gone up. But what is also true is that bank lending rates have jumped by around 3.5 percent only, whereas deposit rates have more than doubled over the past 15 months. Today banks are providing 12 percent interest on fixed deposit and as much as 10 percent on savings. These rates were unthinkable till two years ago. On the other hand, interest rates of corporate loans stand in the range of 10.5 to 13.5 percent and of personal lending in the range of 12.5 percent to 15.5 percent. So the market sentiment is not based on realistic analysis. Banks do not dare to act irresponsibly.
But Nepal Rastra Bank says banks are operating with high spread rate. Isn´t that true?
That is not true. The average spread rate of the industry presently stands at less than 3 percent. The liquidity crunch and other factors have forced us to jack up deposit rates so dramatically that we are finding it tough to transfer the cost to the clients.
How will the real estate crash impact banks?
Of the total real estate loans, which stand at about 20 percent of total exposure, one third is speculative in nature. Hence, the crash will have its impact, but it will not be serious enough to create systemic problem. As for the impact of crash that might appear in financial institutions, it is difficult to predict. We will have to wait till the end of this fiscal year to get a clear picture.
What is your response to new NRB directives like guidelines on service charge and deposit rates?
I heartily welcome the steps that call for transparency in banking operations and proper disclosure of information to the clients. But I do not agree with provisions that restrict banks from levying charges other than processing and commitment fees. If the clients are ready to pay certain charges for additional service, why should NRB say no? The provision related to limiting the savings rates gap at 2 percent is an unwanted intervention. Through this, NRB has controlled prices contradicting the open rate policy.
How do you see the future of banks?
The industry is at crossroad and is in need of immediate structural reforms. Otherwise, it will suffer a sudden brake in its growth. There is a need to further step up the inspection and supervisory capacity of NRB. The government too should be more generous to facilitate merger and acquisition. It should slash the corporate tax on banks to 20 percent from existing 30 percent and provide 3 years tax holiday to encourage mergers and acquisitions. Saving and credit cooperatives, which are not regulated by NRB, are distorting prices and market. The government must regulate it. Otherwise, it will create undue problems to the formal financial system.
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