Shortage of lendable fund grips banks again

Published On: December 21, 2017 05:00 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Dec 21: Interest rates are climbing up again as banks are facing shortage of lendable fund.

Banks are trying to attract deposits by offering interest rate of as high as 12 percent to institutional depositors. Similarly, they are offering up to 10 percent interest rates on fixed deposit accounts to general public. 

The mismatch in deposit and loan growth of bank and financial institutions (BFIs) has put most of the banks in a tight liquidity position. 
Though the interest rates were gradually returning to a normal level due to relaxation on calculation of prudential lending limit offered by the central bank and rise in deposit growth, bankers say that they are again facing stress to balance the deposit and loans growth.

“Banks are already facing stress due to mismatch in deposit and loans growth. The possibility of repetition of last year's problem cannot be ruled out,” Bhuvan Dahal, an executive member of Nepal Bankers Association (NBA), said.

In response to the 'financial friction' caused by the shortage of lendable fund in the banking system, the NRB, through the mid-term review of the monetary policy in the last fiscal year, had eased the rule for banks to calculate their prudential lending limit after many of them ran out of lendable funds. The central bank had allowed banks to calculate credit to core capital-cum-deposit (CCD) ratio by deducting 50 percent of loans extended to the productive sector, helping them to release more funds that they can float as loans. This relaxation, opposed by many including the International Monetary Fund, expired recently.

According to an estimate, commercial banks have a lendable fund of around Rs 60 billion combined. Rastriya Banijya Bank Ltd and other two commercial banks hold more than half of this fund.

Despite the slowdown in deposit growth, commercial banks are still floating loans aggressively in line with their initial target. Observers say that banks, under pressure to ensure dividend to their shareholders in the wake of multifold increase in paid-up capital, have put the lending target at a higher side.

Slow growth of deposit even after the recent elections have worried bankers who were hoping the election-related expenses of the government and candidates will pump more cash into the banking system. The government alone spent at least Rs 20 billion for the recently held provincial and federal elections. But such funds have not entered the banking system yet, say bankers.   

If the government fails to boost capital expenditure, which pumps cash into banking system, the shortage of lendable fund will worsen further, according to bankers.

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