Prudential banking norms take a back seat as banks lend aggressively

Published On: May 17, 2019 08:58 AM NPT By: Republica

While deposits grew by only Rs 282 billion, loans jumped by Rs 342 million

KATHMANDU, May 17: In what appears to be an indication of banking industry’s gross ignorance to prudential norms, commercial banks have continued their aggressive lending practices in the third quarter of the current fiscal year. 

The mismatch in deposits and loans of commercial banks is likely to aggravate the ongoing credit crunch that has been affecting the financial sector for the past three years. 

A study of unaudited financial results of 28 commercial banks shows that they mobilized a total of Rs 2.74 trillion in total deposits, up by 11.46%, or Rs 281.55 billion, in the last nine months ending mid-May. On the other hand, their total lending in the period rose by 16.34%, or Rs 341.76 billion, to Rs 2.43 trillion.

With lending growth outperforming deposit growth, most of the banking institutions are nearing the level of breaching prudential lending limit fixed by the NRB.

The credit to core capital plus deposit (CCD) ratio of three commercial banks is already above 79% and nearing the regulatory limit of 80%. Once they reach 80%, they will have to stop issuing loans and face the central bank’s penalty.

The study shows that 14 commercial banks have CCD ratio between 78% and 79%, while CCD ratio of nine others ranges from 75% to 78%. Only two commercial banks are in a relatively comfortable position as their CCD ratio is below 75%.

A banker told Republica on condition of anonymity that those banks with CCD ratio above 79% could have been breaching the CCD ratio requirement. “Probably, it is end-of-quarter window dressing. The central bank should look into the matter because they might be making investment by circumventing rules and regulation to take unfair advantage while others are playing the game,” the banker added.

The lending spree is also likely building up risks in the banking sector and spells trouble for the financial sector, experts warn. As an important share of bank lending is channeled to real estate related lending as well as overdrafts and working capital collateralized by land and real estate, many believe the rapid credit growth will fuel a sustained rise in asset prices. 

Concerned with the rapid pace of bank loan expansion, the International Monetary Fund (IMF) in its latest report in February advised the central bank to temper excessive credit growth through macro-prudential measures.

“The ongoing sharp credit expansion, which meets the criteria commonly used in the literature to define a credit boom, raises concerns about the quality of lending,” read the report of the Article IV Mission of the IMF to Nepal. 

“The rapid credit growth has fueled a sustained rise in asset prices which may prompt future corrections, and likely built up substantial credit and liquidity risks in the banking system,” it added, urging the central bank to ensure that credit growth slows to a sustainable pace and macro-prudential measures are tightened.

Excessive growth credit is one of the major factors that have been driving up profits of commercial banks in the third quarter of the current fiscal year – FY2018/19 even during the shortage of lendable fund. The study shows that the total profit of 28 commercial banks rose by nearly 20% to Rs 45.67 billion at third year end compared to data of the same period a year ago.

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