The Nepal Rastra Bank, the central bank, has tacitly said it would not come to the aid of banks and financial institutions that are facing shortage of funds that could be disbursed as loans.

This message was relayed on Monday when the central bank released its mid-term review report of the Monetary Policy. The document apparently does not contain any provision aimed at relaxing the regulatory lending limit as demanded by banks and financial institutions. This is a clear signal that the central does not intend to come to the rescue of banking institutions facing shortage of loanable funds.

“We have time and again told banks and financial institutions that shortage of loanable funds is the result of reckless lending practices. If they do not discipline themselves, this problem will crop up again and again,” said central bank spokesperson Narayan Prasad Paudel.

Banks and financial institutions are currently facing severe shortage of loanable funds because of mismatch in deposit collection and credit disbursement. Lately, deposit collection has slowed down because of fall in remittance income and delay in capital spending. On the other hand, credit demand has picked up due to relative improvement in business climate.

This problem, however, is not new to the banking sector.

Last year, when banking institutions faced the same problem, the central bank, while conducting the mid-term review of the Monetary Policy, had relaxed the lending limit. The move was widely condemned as it was seen as a reward for banks that had extended loans beyond their limit.

“We have now made it clear that banking institutions facing shortage of loanable funds should not seek the central bank’s help. They should instead start lending as per their capacity,” Paudel said.

To curb profligate lending, the central bank has also directed banks and financial institutions to reduce the portion of overdraft loans to 15 percent of the credit portfolio within mid-January 2019.

The share of overdraft loans in the credit portfolio of all the commercial banks stood at 17 percent as of mid-December 2017, according to the central bank’s latest report.

The share of overdraft loans in the credit portfolio of development banks, on the other hand, stood at a whopping 24.5 percent in the same period. Finance companies have not issued overdraft loans.

Overdrafts are credit lines extended by banking institutions to businesses and individuals. Once the credit lines are offered, borrowers can withdraw the loan amount whenever they want, albeit they have to be renewed once a year in most of the cases.

Currently, banks are barred from issuing overdraft in excess of Rs7.5 million to individuals. But there is no ceiling for businesses as it is generally assumed they use the credit to manage cash flow and working capital.

Yet the regulator has long suspected that a big chunk of overdraft loans provided to businesses is also being used for speculative purposes, like buying real estate

and stocks. Hence the new threshold.

The latest ceiling will exert pressure on at least 17 commercial banks, whose exposure to overdraft loans exceeds 15 percent of their credit portfolio. Some of these banks are Bank of Kathmandu, NCC, Mega, Global and Siddhartha.

“Overdrafts extended to businesses are generally not risky. But such loans provided to individuals can pose a threat, as borrowers usually do not disclose how they intend to use the credit,” Sanima Bank CEO Bhuvan Kumar Dahal said.