Banks on lending spree despite slow deposit growth

Published On: December 28, 2017 04:00 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Dec 28: Slow deposit growth has not restrained banks from ramping up their loan disbursements, indicating that lendable funds in the banking industry will soon dry up if the situation does not reverse. 

According to the latest data of Nepal Bankers Association (NBA), lending of 28 commercial banks jumped by 0.35 percent, or Rs 7 billion, while their deposit base rose by only 0.27 percent, or Rs 6 billion, in a week (between December 15 and December 22). 

The total outstanding deposit of commercial banks is at Rs 2,199 billion as of December 22, while credit disbursement stands at Rs 1,877 billion. Bank and financial institutions (BFIs) have ignored the central bank's advice to become cautious on their lending and are moving with an aggressive approach even when the growth of their source of fund is very low.
“The lingering gap between credit and deposit growth requires banks to be cautious on their lending,” read the recently released macroeconomic update report of the NRB. 
Due to a mismatch in deposit and credit growth, banks are now facing a shortage of lendable fund.  

This mismatch is pushing credit to core-capital-cum-deposit (CCD) ratio -- the prudential lending limit -- of banks toward the ceiling of 80 percent. The slowdown in deposit mobilization is putting upward pressure on the interest rates. 

According to NRB officials, the average CCD ratio of commercial banks stands at 76.5 percent as of Monday. “It seems that some of the banks are near to the saturation level in terms of the CCD ratio due to aggressive lending,” Narayan Prasad Paudel, the NRB spokesperson, told Republica. “Since the central bank looks at it at a broader level, the industry average is ok for now,” he added. 

Amid a shortage of lendable fund in the banking industry, bank and financial institutions (BFIs) are trying to attract fresh funds by offering higher interest rates on deposits, particularly on fixed deposits. Some banks are coming up with fixed deposit schemes carrying an interest rate of as high as 12 percent. Many borrowers complain that the BFIs have already raised interest rates by 2 to 3 percentage points.   

The 'credit crunch' problem is likely to haunt banks again as their deposit base will deplete when taxpayers withdraw a huge amount for income tax filing by the end of second quarter of the current fiscal year. According to an estimate, deposit in tune of Rs 60 billion will be withdrawn for the purpose by mid-January. 

The treasury surplus maintained by the government due to low capital spending coupled with a slowdown in remittance inflow has put a dent in the growth of deposit volume of the BFIs.  

Bankers, however, say that the recent election-related spending and rise in the capital expenditure along with local units' expenditure will pump more cash into the banking industry.

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