Laxmi Capital News
‘Unpredictability in interest rate hampering the business climate’

While coming to the end of second quarterof this fiscal, banks and financial institutions are under pressure to maintaincredit to core capital plus deposit ratio at permissible level of 80 per cent.Mismatch in credit expansion and deposit collection in this fiscal has pushedBFIs on verge of overshooting CCD level. BFIs were on a very thin cushion andcredit expansion was around 79 per cent of CCD by the end of five months of thefiscal. There is estimation that Rs 80 billion was withdrawn from BFIs for taxpurposes since beginning of January.  PushpaRaj Acharya of The HimalayanTimescaught up with Gyanendra Prasad Dhungana, president of NepalBankers’ Association and CEO of Nepal Bangladesh Bank, to learn how banks aremanaging the situation.

Banks are underpressure to maintain credit to core capital plus deposit ratio at permissible80 per cent. What is your observation on withdrawal of funds and depositcollection till the end of second quarter of this fiscal?

It will be too early to comment on this as wewill be receiving data of fund withdrawal and deposit collection till secondquarter by Tuesday. But we have assumed that banks will not cross the allowedcredit to core capital plus deposit (CCD) level. As per our estimation, aroundRs 80 billion has been withdrawn since the beginning of January and banks areon a very thin cushion of around Rs 40 to Rs 45 billion to meet the permissibleCCD level. They have halted loan expansion since last month as deposit growthhas slowed down. Banks extended loans of around Rs 156 billion in first fivemonths where as deposit collection was just Rs 88 billion. However, at the endof second quarter banks calculate and deposit the interest in their depositors’accounts. Interest payment at the second quarter-end on deposit accounts willexpand the deposit size to around Rs 2,184 billion from Rs 2,100 billion. Onthe other hand, banks are making an effort to recover matured loans andinterests. Thus, I do not think the banks will breach the regulatory provisionsin CCD despite withdrawal of huge fund from the banking channel for taxpurposes.

You havementioned about the mismatch between deposit collection and credit expansion.Why did banks expand credit in such an aggressive manner?

Banks have expanded credit more patiently in thisfiscal due to slow deposit growth. Deposits in the banks continue to bewithdrawn for purpose of filing taxes. Meanwhile, the government has not beenable to accelerate development works and post-earthquake reconstruction. Weexpanded credit on assumption that there will be flow of funds duringelections, government’s capital expenditure will gather pace and foreign directinvestment will also rise as the country has moved towards stability afterpromulgation of the constitution and successful elections. However, they havenot materialised as expected. Government’s capital expenditure is low,remittance growth is negative, export is not encouraging, and foreign directinvestment and capital transfer are negligible. In this scenario, it is difficultfor banks to collect deposits. I have mentioned ‘mismatch’ because we make loancommitments as per the assumption made for deposit collection. Banks aredisbursing only very critical loans since the last month as deposit growthremains sluggish. There is no blame game between Nepal Rastra Bank (NRB) andbanks as the central bank always warns us regarding possible future risks andwe abide by the central bank’s instructions.

Banks havehalted loan disbursement and are struggling to maintain CCD level. Will banksbe able to book more profit in this fiscal compared to the last fiscal?

The situation is not encouraging. We have seenthat average profit growth of commercial banks is below four per cent in firstquarter. Many banks recorded negative profit growth and others could not expandprofit substantially as their cost of deposit rose significantly. Banks haveraised interest rate on deposit schemes to attract more deposits. We can expectthe second quarter to be relatively better than the first quarter. For thesecond half it depends on how long the crisis of loanable fund prolongs. If thegovernment accelerates development works and brings an ideal amount of fundsinto circulation then banks will be able to expand credit. If not they will notbe able to disburse loans.

It looks likebanks will have to work with low profit as their cost of deposit is high. Forhow long do you think will this situation prevail?

I think banks will not be able to generatedouble-digit profit growth for next few years as profit booked in previousyears was on low paid-up capital base and it has been increased by three-foldssince last fiscal. But it is not impossible. The government needs to speed upcapital expenditure to achieve desired economic growth. As per studies, governmentneeds to spend at least 10 to 13 per cent of GDP on infrastructure sector everyyear to bridge yawning infrastructure deficit and unleash economic potential ofcountry. Currently, investment in infrastructure is low at around eight to nineper cent of GDP. On the other hand, government needs to promote FDI,industrialisation and boost exports, which will consequently boost capacity ofbanks to expand loans.

Banks say theyare in a crisis of loanable funds but NRB is saying that it is not a crisis. Isit that NRB has not understood the problem being faced by banks?

The NRB is aware of this problem. We have alsoapproached it to end the perennial problem of credit crunch especially in thethird quarter of the fiscal. NRB had also discussed with Ministry of Finance onhow an ideal amount from government treasury could be brought into circulation.We also requested government to open accounts of public enterprises in banks,so the current challenge could be addressed. However, study panel formed by MoFhas said due to legal constraints funds from government treasury cannot bebrought into circulation through other ways without government expenditure.Another option is refinancing facility but NRB does not have adequate funds toprovide refinancing facility. NRB has fund of around Rs 20 billion to providerefinancing facility whereas according to NRB rules banks can obtainrefinancing facility of up to 25 per cent of core capital. This means banks canmobilise around Rs 70 billion but NRB has only a small amount available. Therehas been misinterpretation about liquidity and loanable fund crisis. Banks canextend loans of up to 80 per cent of core capital plus deposits and ofremaining 20 per cent six per cent is with NRB as cash reserve, around five percent remains as liquid cash in bank vaults, and eight to nine per cent isinvested in government bonds/treasury products. Liquidity crisis is when thereis pressure on cash reserve in NRB. We are in a comfortable liquidity positionas there is around Rs 50 billion liquidity in banking system. Crisis is onlyregarding loanable fund as almost all banks are close to permissible CCD levelof 80 per cent.

NRB GovernorChiranjibi Nepal recently said that banks are more urban centric and have notmade efforts to attract deposits. What do you have to say on this?

That is partially true as there is a highpercentage of unbanked population and there is space to expand outreach. As perNRB’s instruction we are expanding branch network in 130 rural municipalitiesand this will help us to collect deposits. Banks have also expanded theirservices through mobile banking. Banks are doing their best to collect depositsas they are facing scarcity of fresh deposits and interest rate is fluctuatingfrequently. Unpredictability in interest rate is also hampering businessclimate. This is why NRB needs to look into policies that could be obstructingflow of deposits to the banks.

Source: The Himalayan Times, 15thJanuary 2018

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