His comments have come at a time when the banks are flush with cash but are simply sitting on it as higher interest rates have made borrowing unattractive for businesses.[break]
In the first five months of the current fiscal year alone, banks mobilized over Rs 52 billion, while issuing credit of only around Rs 15 billion.
"Putting cash idle in the vaults will do no good to the banks," the finance minister told chief executives of around 21 commercial banks, urging them to "make adjustments" in their credit rates, while keeping the deposit rates unchanged. Currently, banks are offering credit at rates ranging from four percent to 18 percent. But lately, due to excess liquidity, many banks have started slashing short-term credit rates by 0.5-2 percentage points.
Bankers have responded to the statement, saying this is not possible in the short term as "time is not ripe yet". "This is because most banks have not made any changes to the long-term deposit rates," Shovan Dev Pant, CEO of Lumbini Bank, said. "But if the situation (of liquidity and credit outflow) remains the same for quite some time, lending rates will obviously come down."
Yet the finance minister insisted the banks to review the rates and make credit cheaper. Once this happens, Pun said, banks should focus on diversifying their credit portfolio.
The minister said this, pointing to the banks´ inability to expand lending following the stagnation in the real estate market, which has absorbed over Rs 100 billion of banks´ credit. The finance minister said the current real estate prices are inflated and they have to come down.
Finance Minister asked the bankers to stop seeking opportunities in traditional sectors and expand to sectors like agriculture, and small and medium enterprises, which according to him "are productive sectors that can generate ample employment opportunities but have been neglected by commercial banks".
"Since the country´s investment climate is getting better and the government´s number-one priority is economic prosperity, banks should not shy away from issuing credit," Pun said.
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