The Nepal Rasta Bank (NRB), the central monetary authority, is considering tightening the noose around banks and financial institutions that breach the regulatory lending limit, in a bid to prevent health of banking institutions from deteriorating and maintain stability in the financial sector.

The statement comes at a time when some of the commercial banks have been found deliberately flouting the regulatory limit on lending, prompting credit to core capital-cum-deposit ratio to exceed the ceiling of 80 percent. “What some of the banks are doing is unprofessional. We are planning to introduce a provision to prevent this problem from spreading further,” said a senior NRB official on condition of anonymity.

The NRB is still holding discussions on provision it plans to introduce. “We do not want to create panic in the banking sector by introducing a tough regulation. This is the reason why we have always asked banks to follow prudent practices,” the official said.

But moral suasion doesn’t seem to be working, the official added. “That’s why we are being compelled to introduce something that would be binding for everyone,” the source further said. “The provision will be announced when we conduct mid-term review of the monetary policy.”

The NRB is making this move as it recently caught a number of banks intentionally breaching the regulatory lending limit. This was exposed during special inspection of 13 commercial banks that faced acute shortage of funds that could be immediately extended as loans.

Although the names of the banks have not been revealed, many of them were found borrowing funds from other banks at the end of every quarter through interbank lending to meet the regulatory lending limit, said a press statement recently issued by the NRB. “The banks resorting to interbank lending

were also found offering 0.5 percent extra interest to cover up the malpractice,” the statement said.

The central bank generally checks whether banks are meeting the regulatory lending limit at the end of every quarter. There are times when banks face genuine problems in maintaining the lending limit, especially when depositors suddenly retract their deposits. “But what some of the banks are now doing is trying to hoodwink the regulator,” said the NRB official.

Currently, banks are allowed to lend 80 percent of total local currency deposit and core capital combined.

But banks that deliberately violate this norm tend to benefit. This is because additional profit can be reaped 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.

It is known 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. Against this backdrop, inability of the regulator to take appropriate 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, some of the bankers say.