Bankers fear 2.5% countercyclical buffer will hit lending capacity

Published On: July 19, 2016 01:30 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, July 19: The central bank's announcement to set countercyclical buffer requirement for commercial banks, as part of implementing the Basel III standard, at a maximum of 2.5 percent has left the bankers worried.

The fear that such a measure will hit their lending capacity.

Countercyclical buffer refers to the allocation of separate capital by a bank to absorb the loss incurred in an economic downturn preceded by a period of excess economic growth. Countercyclical buffer was introduced by the Basel Committee, a global agency of central bankers around the world that sets the voluntary regulatory and governance standards of banking, as part of the Basel III arrangement.

In line with the Basel III arrangement, Nepal Rastra Bank (NRB) has laid down, among other plans, to enforce countercyclical buffer up to 2.5 percent for the commercial banks as part of the macro prudential norms.

Bankers, however, say that enforcement of such requirement will limit their lending capacity. "Such requirement will squeeze the lending capacity of banks. There are only two or three commercial banks that can maintain 2.5 percent of counter cyclical buffer after 11 percent of capital adequacy ratio," Upendra Poudyal, president of Nepal Bankers Association (NBA), told Republica. "At a time when the government has targeted 6.5 percent economic growth, limiting credit growth means the growth target will be harder to attain."

Experts say that the central bank is likely to trigger the buffer requirement measure against the backdrop of economic growth plunging to one of the lowest levels in recent years and continuous expansion of banks' credit.

"Given that the economic growth has been at one of the lowest levels in recent years, the central bank might have sensed that there could be risk in the banking sector when the credit continues to expand. Hence, it might have given a thought to trigger this measure so that banks will have enough cushion to absorb such risks," Bhuvan Dahal, CEO of Sanima Bank Ltd, said.

"However, the central bank is yet to say how much, if any, the countercyclical buffer banks will have to maintain. It might come up with the exact buffer following the quantitative impact study of the banks," he added.

Earlier from mid-January to mid-July, the commercial banks were adopting the new capital adequacy framework that the central bank introduced in line with the Basel III standard in a parallel way for smooth transition to the new approach. Now, BFIs will have to calculate and maintain the capital as per the new capital adequacy framework.  

NRB officials, however, say that they will introduce the buffer, tying it up with the economic growth. "We are for facilitating credit expansion of the banks, not hampering their capacity. We will come up with the exact buffer in the working procedure soon that will lay out the buffer which will absorb the loss in the economic downturn while not inhibiting the capacity of the banks to lend," Shiva Nath Pandey, executive director at Banks and Financial Institution Regulation Department at the NRB, said.

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