KATHMANDU, Nov 26: Banks have again been aggressively expanding their loans even when their deposit growth has slowed down.
Rapid surge in lending without the growth of deposit, which is the major source of lendable fund for banks, is likely to cause 'financial friction' that the banking industry faced in the last Fiscal Year 2016/17.
The recent data shows that 28 commercial banks have again ramped up their loans despite tepid growth of deposit.
According to data compiled by Nepal Bankers' Association (NBA), the loan expansion rate of 28 commercial banks is nearly double the growth rate of their deposit. These banks' lending rose by Rs 14 billion, or 0.77 percent, to Rs 1,837 billion in a week between November 10 and November 17 compared to an increment of deposit merely by Rs 8 billion, or 0.37 percent, to Rs 2,173 billion.
Bank executives said that they were expanding loans in line with their target and hoped that the deposit would increase once the government expedited its capital spending.
"Banks have taken optimistic approach when it comes to expanding their lending as there is no shortage of liquidity. But it is stashed in a wrong place," said Govinda Gurung, the chief executive officer of Civil Bank Ltd, referring to a huge cash surplus in the government treasury. The spending of capital budget that is currently lying idle in the government treasury pumps cash into the banking system.
However, the mismatch between the lending and deposit growths is likely to repeat the shortage of lendable fund that the banking industry faced in the last fiscal year. Earlier in February, the Nepal Rastra Bank (NRB) had to ease the rule for banks to calculate their prudential lending limit after many of them ran out of lendable funds. The central bank had 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 to float as loans. This relaxation, opposed by many including the International Monetary Fund, got expired only recently.
Bankers have agreed that the shortage of lendable fund is imminent as many banks are nearing the CCD ratio ceiling of 80 percent due to slowdown in deposit growth and rapid rise in lending.
"The elections are just going to take place. We don't know when will there be a new government and when will the capital budget gets spent. These developments have made us suspicious," said Gurung: "If local units receive funds as announced in the budget and spend accordingly, we hope that the problem the banking industry faced last year would not be repeated."
Though bankers strike a hopeful note, there are indications that banks may find difficulties in maintaining the CCD ratio within the regulatory level. To make the CCD issue worse for banks, their deposit base will shrink toward the end of the second quarter when businesses start withdrawing their cash to file taxes.