Nepal Rastra Bank (NRB) has introduced a provision whereby, the banks and financial institutions (BFIs) will be levied hefty fines if they breach the regulatory credit to core capital-cum-deposit (CCD) ratio. According to the central bank directive issued on Thursday, the BFIs will have legal obligations to report their CCD ratio to the regulator on a daily basis from April 14 2017. 

Currently, banks and financial institutions are allowed to extend 80 percent of local currency deposit and core capital as loans. This is referred to as the CCD ratio. 

“If such ratio crosses regulatory threshold of 80 percent, the BFIs have to pay fines equivalent to the bank rate declared by the NRB for the amount of loan issued beyond the CCD ratio,” read the directive issued by the central bank.  The current bank rate determined by the central bank is 7 percent. This means the BFIs breaching the ratio would have to pay fine of 7 percent per annum on the excess amount lent by them. 

The central bank came up with such stringent directive after discovering half a dozen commercial banks breaching the regulatory threshold of the CCD ratio during an on-field inspection by the central bank. The NRB was under immense pressure from various stakeholders after it failed to take immediate action on the banks engaged in unprofessional conduct as it was a loophole that banks exploited readily. It is because they were reaping additional profits by lending a portion of 20 percent of total deposits and core capital that should have been 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 is way more than that. 

However, the NRB has said the situation of credit crunch is improving, with commercial banks in a comfortable position after a number of interventions by the central bank. Introducing the policy provision on the last week of February, NRB restricted BFIs from extending more than 50 percent of the value of vehicle as credit to auto loan seekers-in a move aimed at reducing the flow of credit towards the unproductive sector. Similarly, it reduced the threshold for personal loans to Rs7.5 million from Rs10 million. In the mean time, to replenish the stock of loanable funds, NRB has allowed BFIs to calculate the CCD ratio by deducting 50 percent of loans extended to the productive sector.

“These interventions have kept commercial banks at comfortable position and CCD ratio of the banking sector is within the regulatory boundary,” said NRB spokesperson Narayan Prasad Poudel. “Nevertheless, the central bank will stay vigilant in monitoring any malpractice by the BFIs and booking them in case of foul play.”