Banks’ credit growth outpaces deposits

April 07, 2017

The Himalyan Times, Pushpa Raj Acharya, 7th April 2017, Kathmandu

Banks do not seem to be making any effort to collect deposits after Nepal Rastra Bank relaxed the rules on counting credit to core capital cum deposit ratio through the review of Monetary Policy around a month ago.

Choked due to lack of loanable funds, banks had almost exceeded the permissible CCD limit of 80 per cent by the end of the second quarter of this fiscal and were in fierce competition to attract deposits by offering impressive interest rates. Normally, banks are allowed to lend up to Rs 80 if they collect Rs 100 as deposit.

However, the NRB’s relaxation eased the pressure on banks to increase deposits to extend more loans. While the deposit collection of commercial banks since the second quarter has gone up by Rs 41 billion to Rs 1.84 trillion, loan expansion has surged by Rs 44 billion to Rs 1.63 trillion.

Experts have warned that this situation could create liquidity crunch in the immediate future as around Rs 25 billion would be withdrawn by the end of next week for filing the second instalment of income tax.

Narayan Paudel, NRB spokesperson, said there was excess liquidity of around Rs 40 billion in the market. The provision introduced during review of the Monetary Policy 2016-17 has given lending space of Rs 127 billion as the NRB allowed banks to deduct 50 per cent of the total loan issued to the productive sector while counting CCD ratio till this fiscal-end. Banks have floated loans worth Rs 254 billion to the productive sector.

While providing relaxation, the central bank had urged bankers to attract more deposits to enhance their capacity to expand loans. However, bankers seem to have only expanded their loan portfolio by capitalising on the relaxation of NRB policy, which allowed banks to expand loans up to 86 per cent of the sum of core capital and local currency deposit or CCD.

Kishore Maharjan, vice president of Nepal Bankers’ Association and CEO of Civil Bank, blamed slow expenditure of the government as the major cause for sluggish deposit growth.

“Banks have been offering high interest rates of up to 12 per cent in fixed deposits,” Maharjan said, adding, “Banks are cautiously expanding loans after facing sluggish deposit growth.” He however, stated that banks have almost halted loan expansion, except small amounts and to clients in extremely urgent need and brought down the CCD ratio to below 80 per cent gradually.

The International Monetary Fund has also expressed concerns about NRB’s move relaxing the CCD ratio through its recently released Article IV Consultation Report, citing the temporary regulatory relief granted by the central bank will raise macro-financial risks and affect the stability of the financial sector in the long run.