Deposit-credit mismatch in banking system yet again

Published On: September 13, 2018 07:34 AM NPT By: Republica  | @RepublicaNepal

Banks on aggressive credit expansion

KATHMANDU, Sept 13: With more lendable resources at their disposal, commercial banks are aggressively increasing their loan investments. 

Commercial banks, which saw their deposits swell in the last month of the past fiscal year, are now utilizing such stocks of lendable funds for credit expansion. As a result, lending growth of commercial banks surpassed deposit mobilization in the first two months of the Fiscal Year 2018/19.

Data compiled by Nepal Bankers Association (NBA) shows 28 commercial banks added a total of Rs 9 billion in new local currency deposits in the first two months (between July 16 and September 7) of the current fiscal year, while their lending shot up by Rs 44 billion. As of last Friday (September 7), the total outstanding local currency deposits of 28 commercial banks stand at Rs 2,398 billion and loans at Rs 2,101 billion. 

The rapid expansion of bank loans comes at a time when interest rates are at an ultra-high level and showing no sign of correction. While banks are reluctant to reduce interest rates, which have skyrocketed on the accounts of mismatch between loan and deposit growth, they are cashing in on the availability of the funds. There was a significant growth in deposits in the last months of FY2016/17 due to increased government spending which provided a respite for banks whose credit to core capital cum deposit (CCD) ratio was at a saturation level of 80 percent. Banks were struggling to increase their deposit volume after the high CCD ratio curtailed their lending capacity further. This has led to the intense competition to raise interest rates to attract fresh deposits. 

Commercial banks seemed to be repeating the same practice that triggered the crunch of the lendable fund in the banking system and sent interest rates upward.

According to the NBA, the average CCD ratio of commercial banks is currently at 75 percent. This means that they have ample space to expand their loans. 

A banker estimates that banks have the capacity to make fresh loan investment of nearly Rs 100 billion. “The availability of this adequate lendable fund is mainly due to significant growth in deposits in the last month of FY2016/17 with the government spending pumping more cash into the banking channel,” Bhuvan Dahal, CEO of Sanima Bank Limited, told Republica. “Instead of putting this fund idle, they are making an investment because that’s going to maximize their profits,” added Dahal. 

The buoyancy in the part of bankers is also from a hope that the approaching festive season would increase remittance inflow and thus their deposits.

 The ease in liquidity position of banks should have also caused interest rate correction. But bankers say that a fear of recurrence of the CCD ratio problem after the second quarter is keeping them from reducing interest rates. “Yes, the interest rates have not gone down even when banks are in a comfortable position. This is because it is a temporary phenomenon and the position will be tight again toward the end of second quarter of FY2017/18,” he added.

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