Nepal Rastra Bank (NRB) has turned down the private sector’s request to relax the credit to core capital-cum-deposit (CCD) ratio in order to help banks and financial institutions (BFIs) to cope with liquidity crunch.

An NRB board meeting held on Wednesday and Thursday decided not increase the CCD ratio to 85 percent as demanded by the private sector.

“Promoters and management of BFIs as well as other business people have been requesting us to increase the CCD ratio to 85 percent from existing 80 percent,” said NRB Deputy Governor Chintamani Siwakoti. “However, the central bank is in no mood to provide such relaxation to BFIs as it can exacerbate the systemic risk in the banking industry in future.”

The board came to a conclusion that relaxing the CCD ratio is only a temporary solution, and banks should find an appropriate solution, such as increasing interest rate on deposits, Siwakoti added. “Nevertheless, NRB understands the gravity of current problems and we are also trying to find an appropriate solution,” he said.

Confederation of Nepalese Industries (CNI), an umbrella body of manufacturing and services enterprises, had on Wednesday called on NRB to hike the CCD ratio to 85 percent until the time BFIs create adequate stock of loanable funds.

Lately, many BFIs are facing severe shortage of funds that could be immediately extended as loans. 

This shortage is the result of an uptick in credit demand in the aftermath of the Indian trade embargo. 

But this rise in credit demand has not been matched by deposit growth, because of deceleration in remittance flow. 

Banks have collected fresh deposits of Rs154 billion since the beginning of this fiscal year in mid-July till January 13, show the latest data of Nepal Bankers’ Association (NBA). In contrast, credit flow has stood at Rs204 billion.

This mismatch in deposit collection and credit disbursement is the major reason for shortage of loanable funds. 

Currently, BFIs are allowed to convert 80 percent of deposits into loans. 

Meanwhile, NBA has said increasing the CDD ratio would only fix the problem in short term and BFIs should find an amicable solution to the problem on their own. “We have invited stakeholders, including NRB, Finance Ministry, National Planning Commission, and private sector representatives for discussions next week,” said NBA President Anil Shah.