Banks complain of shortage of loanable funds—and continue to increase net profit

May 15, 2019

Rajesh Khanal, The Kathmandu Post, May 15, 2019

Almost all of the 28 commercial banks in the country have posted a significant increase in their net profit in the first nine months of the current fiscal year, although they had been complaining throughout the period about the shortage of loanable funds and were reluctant to reduce the interest rate on loans.

The unaudited third-quarter financial reports published by ‘A’ class financial institutions show that the banks secured profit worth Rs44 billion in total, a growth of, on an average, 17 percent.

Except Civil Bank and Century Bank, all 28 banks have secured net profit of over Rs1 billion.

While the profit of Nabil Bank and Rastriya Banijya Bank crossed Rs3 billion, Nepal Bank Limited, Nepal Investment Bank, Everest Bank, Agriculture Development Bank, Himalayan Bank and NIC Asia Bank made net profit of more than Rs2 billion during the review period.

Profits of NIC Asia and Mega Bank were doubled between mid-July and mid-April this year, compared to the same period in the last fiscal year. The profit amount of Century Bank, Nepal Investment Bank and Nepal Bank Limited was down during the review period.

While there are concerns over the rising profit of banking institutions despite lack of loanable funds, bankers say they managed to achieve an impressive hike in their profit due to an increase in the volume of their businesses.

Gyanendra Dhungana, president of Nepal Bankers’ Association, said the demand for loans from the private sector was high despite high interest rates charged by banks on the pretext of the increased cost of funds.

“Although business people complained of high interest on loans, demand for credit kept on increasing, as they were able to pass on the increased cost to their consumers,” said Dhungana.

Runaway interest rates have been a cause for concern for the business sector for long, as they struggle to sustain their enterprises because they have to utilise a large chunk of their fund in debt servicing.

Dhungana said the banks have ample room to extend their loan portfolio despite the crunch in the loanable funds.

According to him, credit to core capital-cum-deposit (CCD) ratio with the banks, on an average, stood at 79 percent.

Nepal Rastra Bank has fixed the CCD ratio at 80 percent, which means that banking institutions cannot extend more than 80 percent of the deposit and core capital as loans.

“We have the flexibility to have credit expansion within this limit,” said Dhungana.

Dhungana also expressed that the rise in banks’ capital has also allowed them to expand their business, mainly in rural areas.

“Recently, 26 banks have increased paid-up capital by four times and their networks have increased with the branch expansion drive and their volume of business--particularly deposits and loans--have also grown exponentially in recent times,” said Dhungana.

According to the record of Nepal Bankers’ Association, the loan issued by banks grew by 21 percent to Rs2.42 trillion while the deposit collection increased by 19 percent from mid-July to mid-April this year.

Except for Kumari Bank and NCC Bank, the rest of the banks have met the capital requirements of Rs8 billion as directed by Nepal Rastra Bank.

Agriculture Development Bank has the largest paid-up capital of Rs14.44 billion followed by Nepal Investment Bank with the paid-up capital of Rs12.58 billion, according to the unaudited report issued by the commercial banks.

The eight months’ current macroeconomic report of the Nepal Rastra Bank shows that the deposit collection by the banks and financial institutions rose by 9.7 percent during the review period. Over the period, the credit to the private sector increased by 14.6 percent.

According to Dhungana, banks are slowly relaxing the interest rate. “Based on the spread rate of 4.5 percent, banks are now providing the loan at 11-13 percent from over 15 percent previously,” said Dhungana, adding that many banks have reduced the base rate to as low as 9 percent from more than 11 percent a few months ago.

Spread rate is fixed by the Nepal Rastra Bank. If the spread rate is, for example, set at 5 percent, banks that give 8 percent in deposits can charge only 13 percent in loans.

Even though the banks claim that interest rate on loans has come down to 11-13 percent, in practice, it is more than 15 percent, which experts say is largely due to the weakness of the regulatory body.

Keshab Acharya, a former official at Nepal Rastra Bank, said although the regulator has maintained the spread rate at 4.75 percent at present, many banks are not abiding by it. “Regulation of the central bank is weak and banks are not complying with the rules,” Acharya told the Post.

Anukool Bhatnagar, managing director and chief executive officer of Nepal SBI Bank, however, attributed the profit to banks’ move of diversifying their business portfolio and reducing the non-performing loan.

“Recently, the banks have been focusing on alternative business areas such as remittance and card issuance to expand their business amid the shortfall in loanable funds,” said Bhatnagar.

According to Bhatnagar, the high spread rate until recently also helped banks earn more profit.

“With the reduction in spread rate to 4.5 percent, that will come into effect from the next fiscal year, the banks’ profit earnings are likely to come down,” said Bhatnagar. “The banks were successful to recover their non-performing loans of the past, which also contributed in increasing profit.”   

Bhuvan Dahal, chief executive officer of Sanima Bank, echoed Bhatnagar. “The demand for loans has soared mainly in the sectors like hydropower, cement industry and hotels,” said Dahal.

But Acharya said banks are mainly victimising captive customers, those who are not quite familiar with the banking practice and those who cannot raise their voice against the financial institutions and their manipulations.

“Most of the banks have not reduced the interest rate on loan,” said Acharya, “even though they have maintained the base rate at a lower side.”



Submit your details below to receive Newsletters