NRB relaxation enables banks to extend loans without getting new funds
KATHMANDU, March 30: While banks have heaved a sigh of relief after the regulation issued the Nepal Rastra Bank (NRB) allowed them to use their funds to extend credits even without getting new deposits, the real problem of 'credit crunch' is yet to go away as their deposit base has not expanded significantly.
According to Nepal Bankers Association (NBA), 28 commercial banks added only Rs 5 billion in new deposits in a month-long period that ended on March 24.
Between February 24 and March 24 -- the latest available data - the commercial banks floated Rs 1 billion in new loans and advancements. As of March 24, the total deposit and credit of BFIs have reached Rs 1,946 billion and Rs 1,632 billion respectively.
Banks have been facing shortage of lendable fund for past few months after their credit expansion outpaced the deposit growth rate. As bank's credit flow started rising amid aggressive lending, credit to core capital-cum-deposit (CCD) ratio of many commercial started to cross the regulatory limit of 80 percent, making it difficult for them to expand loans. Lending came to a halt in many banks that breached the CCD ratio, prompting rise in interest rates on both loans and deposits. While one-year fixed deposit rate went up to as high as 13 percent, BFIs were also quick to increase their lending rate. However, rise in the fixed deposit rate failed to lure depositors as the deposit stock did not increase much.
“The solution to lendable fund crisis is the rise in the source which is deposit. However, the main source has not increased much in recent weeks,” Bhuvan Kumar Dahal, an executive member of the NBA, told Republica.
He also said that banks were still enjoying the regulatory relaxation on calculation of CCD ratio which has increased their lending capacity even without increasing deposits.
NRB offered a relaxation to the BFIs through mid-term review of the monetary policy for calculation of the CCD ratio which allowed them to float loans without adding deposits. The central bank allowed the bank to subtract 50 percent of productive sector loans from the CCD ratio until mid-July this year.
This regulatory relaxation implies that banks can extend loan amounts equivalent to 50 percent of the credit expanded in the productive sector even without getting fresh deposits.
This regulatory bounty to the BFIs, who are accused of 'reckless' lending behavior, has also drawn flaks. The International Monetary Fund (IMF) recently warned that this particular relief measure raises macro-financial risks. “Temporary regulatory relief granted by the central bank in February would allow for continued rapid credit growth, raising macro-financial risks,” reads the full report of the Article IV Mission of the IMF that was released on Tuesday.
“…the central bank provided relief to banks with regard to the 80 percent loan-to-deposit (LTD) ratio ceiling. This relief should be withdrawn promptly when it lapses in mid-July, in order to moderate credit growth, normalize interest rates, discourage excessive risk taking, and reduce the impetus to capital outflows,” added the economic and financial surveillance report of Nepal prepared by the IMF.
Bankers predict that the deposits volume is less likely to increase in the coming few weeks. Instead, the shortage of lendable fund might worsen if the capital expenditure is not increased significantly.
“By Chaitra end (mid-March), deposits ranging from Rs 30 billion to Rs 40 billion will deplete due to filing of tax by taxpayers,” Dahal, who is also the CEO of Sanima Bank Ltd, said. “However, we can expect the situation to get better after that as developer expenditure increases significantly in the last months of the fiscal year,” he added.
Nepse down 22 points
At a time when bank and financial institutions (BFIs) are fretting about the slow growth of deposits in banking system, the stock market is observing high transaction volume.
Though the benchmark Nepal Stock Exchange (Nepse) index fell 22.33 points after a wild ride on Tuesday, the daily turnover doubled to Rs 2.55 billion when 5.05 million units of shares of 149 companies changed hands through 14,596 transactions.
“Many investors maintain cash cushion while short-term investors are also pouring their money into the market that is rising. Similarly, the money stuck in mega FPOs is also coming to the market,” Anjan Raj Poudyal, former president of Stock Brokers Association of Nepal, said.