Second, it will help check possible manipulations of deposits to maintain the credit-deposit (CD) ratio at a desired level. A previous provision had given room for the BFIs to tactically play with the deposits rates to meet basic prudential norms like the CD ratio. Such tactics were employed for immediate benefits, largely ignoring the longer term impact on financial health.
Thirdly, the NRB decision will force BFIs to refocus on the core banking operation of lending deposits to the market rather that maintaining deposits at other institutions at higher interest rates. BFIs, if they are true to their function, are expected to create assets by lending out deposits to the market. But as the country entered a high interest rate regime, more BFIs in recent years have been re-saving their collections in other institutions, something which has diluted their core banking function. Hence, we welcome the NRB decision in this connection.
But at the same time, we would like to add that we feel concern over the haste with which the central bank decided to enforce the new provision. The new policy will impact on prices and liquidity. As the banks easily have around Rs 10 billion in deposits in other FIs and the volume of FI accounts in banks is higher still, a sudden need to shunt the money to the interest paying sectors can unleash a host of risks.
First among these, it could affect liquidity, as the FIs are expected to start withdrawing their savings from BFIs. Liquidity had just started to ease after a gap of some two years. Secondly, it could encourage institutions to jump into risky lending. And thirdly, it could even cause money from NRB-licensed financial institutions to move to vulnerable cooperatives that promise high interest returns.
If any of these scenarios surfaces, Nepal’s financial sector could plunge into a fresh round of troubles. A similar sudden enforcement of a cap on realty lending had created a hue and cry in the sector, and eventually the central bank was required to make a number of corrections to manage the adverse impact of the hasty enforcement. Our experience has been that hasty enforcement brings more bad results than good. Hence, we urge NRB to take all required measures to forestall any adverse impact of its fresh decision.
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