Banks pursuing 'aggressive' lending policy despite slow deposit growth

Published On: October 27, 2017 01:00 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Oct 27: Commercial banks pursued aggressive lending policy in the first quarter of Fiscal Year 2017/18 even though their deposit growth in the period remained tepid, data compiled by Nepal Bankers Association (NBA) shows.

According to the central bank, loan mobilization of 28 commercial banks grew by 1.31 percent in the first quarter while their deposits grew by a mere 0.69 percent. The data shows that total deposit of 28 commercial banks increased to Rs 2,142 billion as at mid-October from Rs 2,106 billion in mid-August, while their lending rose to Rs 1,787 billion in mid-October from Rs 1,732 billion of mid-August.

Lending surged by Rs 20 billion in a week when the deposit grew by only Rs 7 billion. Loan mobilization of 28 commercial banks climbed up to Rs 1,807 billion on October 22 from Rs 1,787 billion on October 13. However, the deposit volume went up to Rs 1,780 billion on October 22 from Rs 1,759 billion a week earlier. 

This huge mismatch in deposit and credit growth is likely to worsen the credit to core-capital-cum-deposit ratio of commercial banks at a time when they are required to bring such prudential lending limit to 80 percent by mid-October. Phasing out the facility to deduct 50 percent of outstanding loan in specified sectors in the calculation of CCD provided to the BFIs after they faced shortage of lendable fund due to the prudential lending limit, the Nepal Rastra Bank (NRB) had given deadline for the BFIs which exceed the regulatory CCD ratio of mid-October to bring down to the regulatory limit of 80 percent. 

BFIs were expected to raise a significant amount of deposits to put themselves on a comfortable CCD position by this time. However, the lending growth has continued to surpass deposit mobilization. If the CCD ratio goes up toward the upper limit set by the central bank, interest rates are less likely to observe correction as anticipated. 
The market was expecting the interest rates to fall in the second quarter of the current fiscal year when BFIs publish their base rate. The new rule of the central bank requires BFIs to tie their lending rates with the base rate. 

The NRB had provided BFIs the relaxation in the calculation of the CCD ratio through the mid-term review of monetary policy of the last fiscal year 2016/17. The banks were on a lending spree at that time despite the central bank's repeated cautions to stop 'aggressive' credit expansion.  

“As the deposit volume of banks has not gone up significantly as expected in recent months, I do not see the possibility of the interest rate going down too much in the second quarter,” said a banker. “However, there will be a minimal correction on interest rates which remained at a very low level in the last fiscal year,” the banker added. 

Bankers attribute weak government spending in the first quarter as well as slowdown in remittances flow to tepid deposit growth in the first quarter of the current fiscal year while improving business climate has encouraged private sector to borrow more to expand their business or start new business projects which have led to credit surge.

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