Governor Nepal hints at lowering CRR
KATHMANDU, Feb 7: Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal has said that the present mismatch between deposit collection and loan mobilization was because of the lack of financial discipline in bank and financial institutions (BFIs).
Speaking at a meeting of the parliamentary Public Accounts Committee (PAC) on Monday, Governor Nepal said that the haphazard lending practices of BFIs was to be blamed for the current crunch of loan-able fund in the banking system.
"As per our estimate, 20 percent growth in credit flow can help to achieve 6.5 percent economic growth. However, the variation in deposit and loan growth, which is higher than our forecast, is a result of lack of financial discipline in BFIs," he added.
While the central bank has made a forecast of 20 percent growth in credit flow to the private sector to achieve 6.5 percent of economic growth, overall bank credit to private sector jumped by 30.4 percent (year-on-year) as of mid-December last year. Through a monthly report, the central bank has already urged banks and financial institutions 'to exhibit prudent and cautious lending behavior' while moving forward.
Concluding that credit excesses on risky areas could overheat the economy, the central bank has remained reluctant to resolve the current shortage of loan-able fund, observers say. Instead, the NRB has been instructing BFIs to raise saving deposit rates to attract and retain deposits to maintain the CCD ratio.
As the credit to core-capital-cum-deposit (CCD) ratio requirement of many BFIs is either above or nearing the upper limit of 80 percent, they are facing acute shortage of fund to extend credits. NRB officials say that nearly one and half dozen commercial banks have already breached the CCD ratio ceiling, implying that they are no more in a position to lend money to borrowers until they find fresh deposits.
During the PAC meeting, the NRB Governor came down heavily against BFIs for their aggressive lending practices and lack of proper liquidity management skill.“BFIs are seeing shortage of loan-able funds because there is a trend to extend loans to whoever they see in their door without looking into their background," he added.
Governor Nepal also said that they were analyzing a report about their inspection of 13 banks that the central bank made in the aftermath of the credit crunch problem. He also hinted that the central bank could review the cash reserve requirement if the current problem continues till the mid-term review of its monetary policy for the Fiscal Year 2016/17.
If the CRR, a portion of deposit that the BFIs are required to park at the central bank in cash, is lowered, more loan-able funds will be available to BFIs.
Also speaking at the meeting, lawmakers accused the BFIs of being reluctant to extend loans in productive sectors. "Banks have been extending auto loans at 5 percent while they charge as much as 20 percent on loans to productive sector," Ram Hari Khatiwada, a Nepali Congress parliamentarian, said in the meeting.