Lending by commercial banks has outpaced deposit collection, thus putting pressure on the credit to core capital-cum-deposit (CCD) ratio which cannot exceed 80 percent as per central bank regulations.

Five months into the fiscal year, the 28 commercial banks in the country had extended Rs215 billion as loans and advances. During the same period, they collected only Rs161 billion in deposits, showing a serious mismatch between deposit collection and credit disbursement.

At the start of the fiscal year in mid-July 2018, lending by commercial banks stood at Rs2,111 billion while their total deposit collection amounted to Rs2,470 billion. By December 28, lending had swelled to Rs2,326 billion while deposit collection reached Rs2,631, according to the latest report of the Nepal Bankers’ Association, the umbrella association of commercial banks operating in the country.

As a result, the CCD ratio of most banks has reached the regulatory threshold, preventing them from lending more despite the high demand for loans from the private sector. “Demand for credit from the private sector is still high,” said Bhuvan Dahal, CEO of Sanima Bank. “The situation will worsen in the next few weeks when Rs60-70 billion will be mopped up from the system as businesses make advance tax payment to the government.”

Unless capital expenditure by the government increases and money is injected into the economy, the banking industry will be under pressure with a majority of banks struggling to lend, Dahal added.

Although the CCD ratio of a majority of banks is near 80 percent, none of them were found breaching the statutory limit, according to Nepal Rastra Bank, the central monetary authority of the country. “Our supervision department is keeping a close eye on the banks that are close to the regulatory threshold of the CCD ratio,” said spokesperson Narayan Prasad Poudel.

Banks want Nepal Rastra Bank to relax the CCD ratio, thus freeing up funds for lending. Although the central bank rejected the demand to increase the CCD ratio outright, it has offered to be more lenient with regard to loans and advances made under concessional lending. As per a circular issued recently, loans extended to earthquake survivors, young entrepreneurs, projects led by returnee youths, women entrepreneurs and people from the Dalit community, among others, are exempt from the CCD ratio requirement.