Banks breaching the limit set on lendingSome of the commercial banks have started posing a threat to the country’s financial stability, as they have been found to be deliberately breaching the regulatory limit on lending for quite some time and covering up the malpractices by manipulating the figures on the balance sheets.
Some of the commercial banks have started posing a threat to the country’s financial stability, as they have been found to be deliberately breaching the regulatory limit on lending for quite some time and covering up the malpractices by manipulating the figures on the balance sheets.
This came to light after the Nepal Rastra Bank, the banking sector regulator, conducted a special inspection of banks following complaints about acute shortage of funds that could be immediately extended as loans.
Lately, many banks and financial institutions are facing severe shortage of loanable funds because of mismatch in deposit collection and credit disbursement. The country has lately witnessed a slowdown in deposit collection due to deceleration in remittance inflow, while demand for credit has gone up since the Indian trade embargo was lifted.
This has put some of the banks in a tight spot, making them difficult to meet the regulatory limit on lending.
“But latest findings have shown that some of the banks were deliberately manipulating the credit to core capital-cum-deposit ratio for quite some time and financial reports submitted by them included window dressing,” said a reliable NRB source stopping short of revealing the number and names of banks engaged in the malpractice.
Currently, banks are allowed to lend 80 percent of their total local currency deposit and core capital combined. The stock of local currency deposit of 28 commercial banks in operation stood at Rs 1,775 billion as of January 27, show the data of the Nepal Bankers’ Association. These banks maintained core capital of Rs 209.6 billion as of mid-December. Even if it is assumed that the stock of core capital expanded by Rs 10 billion till January 27, the core capital at banks would stand at Rs 219.6 billion. This would put sum of deposit and core capital at Rs 1,994.6 billion. Banks are allowed to lend 80 percent of this amount, which is Rs 1,595.7 billion. But as of January 27, banks had already extended Rs 1,611 billion, breaching the regulatory lending limit. This is probably the first time in recent years that such a problem has been seen in the entire commercial banking sector.
“We check whether loans extended by banks are within the regulatory limit through quarterly reports they submit, because daily reports that we receive do not provide comprehensive picture,” NRB Spokesperson Narayan Prasad Paudel said, acknowledging that some of the banks have “flouted the rules”. But he fell short of saying whether action would be taken against financial institutions engaged in malpractices.
This silence maintained by the regulator is working as a reward in disguise for banks engaged in unprofessional conduct. This is because they are reaping additional profit by lending a portion of 20 percent of total deposit and core capital that should either be kept in the form of cash or invested in secure liquid assets. Hard cash parked in vaults does not generate any return, while yields on liquid assets, such as government bonds and treasury bills, stand at less than 5 percent. On the other hand, interest rate on credit stands at a minimum of around 8 percent.
This clearly shows that those violating the central bank’s norms are benefiting.
Against this backdrop, inability of the regulator to take action against those playing foul would set a wrong precedent in the banking sector and create an uneven playing field for those abiding the rules.
“If banks had crossed the regulatory lending limit in any particular day or week, stringent action is not necessary. But if they are deliberately misreporting then the central bank should conduct on-site inspections more often as this practice would only deteriorate the financial health of the institutions,” former NRB governor Yubaraj Khatiwada said.