The Ministry of Finance (MoF), in coordination with the central bank, will formally introduce a short-term policy next week to ease the pressure on banks and financial institutions that are facing severe shortage of funds that could be immediately disbursed as loans.

The MoF has formed a taskforce under Ram Sharan Pudashaini, head of the Economic Policy Analysis Division at the Finance Ministry, to look into this matter. The taskforce will submit its recommendations on Sunday, according to Finance Secretary Shankar Prasad Adhikari. “We will then go through the recommendations and finalise a policy to reduce pressure on banks and financial institutions that are facing shortage of loanable funds,” he said.

Although the finance secretary did not give a hint on measures that are being discussed to provide relief to cash-strapped banking institutions, he said the government was thinking of channelling a portion of funds piled up in its coffers to the banking system.

The government’s treasury surplus currently hovers around Rs328 billion. This money includes guarantees pledged by contractors, funds allocated for various purposes like post-earthquake reconstruction and droughts, and savings of the previous year.

“A big portion of the fund is committed for special purposes, so we cannot be extravagant. But we can certainly use it for a short period, say, up to six months,” Adhikari said. “By then we expect the problem faced by the banking sector to be over.”

Banks and financial institutions have seen rapid depletion in funds that could immediately be provided as loans because of mismatch in deposit collection and credit disbursement. Commercial banks added Rs112.7 billion to their deposit portfolio since the beginning of the fiscal year on July 16 till December 31, show the data of the Nepal Rastra Bank (NRB), the central bank. But they extended Rs167.4 billion in credit during the five-and-a-half-month period.

This asset-liability mismanagement has exerted pressure on credit to core-capital-cum-deposit (CCD) ratio of banks and financial institutions. The central bank has fixed CCD ratio of 80 percent for banking institutions. This means banking institutions cannot lend more than 80 percent of their total local currency deposit and core capital combined. 

Although none of the bank has breached the lending limit so far, CCD ratio of more than half of the commercial banks exceeded 77 percent as of December 29, show the latest data of the Nepal Bankers’ Association, the umbrella body of commercial banks. Of these banks, CCD ratio of six has crossed 79-percent mark and another six have seen the ratio exceed 78 percent.

This indicates many banks are walking a tightrope and may no longer be able to provide loans which will hit their profits. 

Banks are facing this situation because of combination of slow deposit growth and hike in credit demand. Deposit growth has virtually stalled because of fall in remittance income and slow government spending, whereas credit demand has been going up due to gradual improvement in business climate. This has pushed up retail deposit rates to 12 percent, leading to sharp hike in lending rates as well. 

This, however, is not the first time the banking sector is facing this problem. 

The sector found itself in the same situation last fiscal year due to same reasons, indicating recurrent nature of the problem.

“One of the reasons for this is the central bank’s decision to allow banks to raise their paid-up capital through issuance of rights shares,” Himalayan Bank CEO Ashoke Rana said. The central bank, which also functions as the banking sector regulator, in July 2015, directed commercial banks to raise the minimum paid-up capital by four-fold from Rs2 billion to Rs8 billion within mid-July 2017. 

“Had the central bank pushed for merger to meet the new minimum paid-up capital requirement, the banking sector probably wouldn’t have faced the current problem,” said Rana. “But since banks were allowed to float rights shares to increase the capital, many promoters acquired loans in the last fiscal year to purchase those stocks. This led to depletion of loanable funds.”

The situation probably would have eased had the government increased its spending, especially capital spending. This would have raised deposit stock of banks. But the government utilises a big chunk of the capital budget—which is largely used for construction of physical infrastructure—towards the end of the fiscal year because of ineffective planning and project implementation. This results in underutilisation of revenue collected by the government for better part of the year. Hence, bankers have long called on the government to allow them to tap on its savings at times when public spending has not picked up. 

Yet it is not easy for the government to heed this call, as it cannot deposit its funds in any place other than the central bank. This means the government cannot simply deposit the surplus funds in accounts of banks. 

“Considering this legal hurdle, the government can ask the central bank to tap its savings to provide refinancing facility to borrowers who are planning to invest in the productive sector,” said Sanima Bank CEO Bhuvan Kumar Dahal. “This would help banks to expand credit and benefit borrowers as they would get loans at rates lower than that available in the market.”

General refinance facility, for example, is extended to “good” borrowers who wish to invest in productive sectors such as physical infrastructure, tourism and small and medium enterprises. Under this facility, the central bank offers credit to banks and financial institutions at 4 percent interest. Banks and financial institutions then have to offer funds to borrowers at interest of up to 9 percent.

Yet many are questioning whether the government should come to the aid of banks, as they dug themselves into a hole with their inability to strike a balance between deposit collection and credit disbursement.

Credit to core-capital-cum-deposit ratio of banks (Figures as of Dec 29)

Machhapuchchhre 79.29%

Century 79.20%

Agricultural Development 79.15%

Mega 79.15%

Civil 79.10%

Citizens 79.05%

Sunrise 78.75%

Nepal SBI 78.73%

Janata 78.62%

Laxmi 78.42%

Nepal Investment 78.40%

NIC Asia 78.03%

Sanima 77.93%

Siddhartha 77.90%

Global IME 77.74%

Himalayan 77.54%

Prime 77.13%

NMB 76.50%

Nepal Credit & Commerce 76.42%

Kumari 76.40%

Nepal Bangladesh 76.35%

Prabhu 75.77%

Bank of Kathmandu 74.43%

Nabil 73.54%

Standard Chartered 72.00%

Everest Bank Ltd. NA

Nepal Bank Ltd. NA

Rastriya Banijya Bank NA

 Source: Nepal Bankers Association