Money
Commercial banks found exceeding lending limit
More than 50 percent of the commercial banks operating in the country are found to have breached the regulatory threshold of the credit to core capital-cum-deposit (CCD) ratio.Bibek Subedi
More than 50 percent of the commercial banks operating in the country are found to have breached the regulatory threshold of the credit to core capital-cum-deposit (CCD) ratio. According to Nepal Rastra Bank (NRB), the CCD ratio of around 15 commercial banks have exceeded the regulatory limit of 80 percent.
As per the regulatory provision set by NRB, the regulatory authority of banks and financial institutions (BFIs), banks can lend only up to 80 percent of their total funds (deposits and capital), but due to excess lending over the last six months, the ratio has gone beyond that.
Despite a regulatory breach of this magnitude, the central bank is not considering taking any action against the commercial banks. “We have found out that commercial banks have been lending beyond the regulatory limit while observing their daily reports,” said Narayan Prasad Poudel, spokesperson for NRB.
“But the central bank generally does not take action against BFIs based on their daily reports. However, we have already spoken with the management of the banks whose CCD ratio has gone beyond 80 percent and have warned them to take corrective action immediately,” added Poudel. “Also, if they are found to have breached the regulatory requirement in their financial statement for the second quarter of this fiscal year, NRB will take stringent action against them,” he said.
The central bank is of the view that the ongoing liquidity crunch in the banking industry is due to reckless lending by commercial banks despite a slow growth in deposit collection.
“Bankers should have known that increasing loans without a matching growth in deposits would result in the kind of situation that prevails now,” said Poudel. “But they ignored the basic principle of banking which has landed them in a crisis situation.”
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 a deceleration in remittance flow.
Banks have collected fresh deposits of Rs154 billion from the beginning of this fiscal year in mid-July till mid-January, as per the latest data of the Nepal Bankers’ Association (NBA).
In contrast, credit flow amounted to Rs204 billion. This mismatch in deposit collection and credit disbursement is the major reason for the shortage of loanable funds.
According to NRB, the onus is on bankers to solve the current problem. “They have to increase deposits while slashing lending to unproductive sectors,” said Poudel. “If they do so, they will gradually come to a comfortable position.”
Bankers, however, are expecting some regulatory relaxation by the central bank including an increase in the CCD ratio to solve the current liquidity crunch problem.
The central bank is in no mood to offer such a relaxation and has turned down bankers’ request to relax the CCD ratio in order to help them to cope with the liquidity crunch. An NRB board meeting held last week decided not to increase the CCD ratio to 85 percent as demanded by them.
Some bankers said the current situation was temporary in nature and the liquidity crunch would at ease within a couple of months. “With a rise in the lending rate, credit demand will decrease; and money supply will also increase to the banking industry due to government spending,” said the CEO of a commercial bank.
“But the central bank might have to rescue a few commercial banks that are facing a severe liquidity crunch.” Currently, a couple of banks are finding it difficult even to return cash to depositors, the source added.