Kathmandu, January 28

Nepal Rastra Bank has ruled out special provisions and said banks and financial institutions should try to resolve the severe liquidity crisis themselves by making use of all available options.

While the central bank has already turned down the proposal of revising the credit to core capital cum deposit (CCD) ratio, it is also not too enthused about long-term refinancing facility sought by commercial banks to cope with the current liquidity crunch.

“It’s not like banks have exhausted all options,” said Chinta Mani Siwakoti, deputy governor of NRB. “Why don’t they raise interest on normal savings account to lure more depositors?”

Commercial banks started raising rates since the second quarter of this fiscal, with two institutions offering up to 12 per cent interest on fixed deposits.

According to Jyoti Prakash Pandey, CEO of Nepal Investment Bank, high cost on deposits for longer term will have adverse impact on the economy as lending rates will also have to be hiked. However, Siwakoti said banks should try to get out of the rut they have put themselves in by adopting all available means instead of knocking on NRB’s door for an easy way out.

The central regulatory and monetary authority has said the current problem seen in the banking sector is due to short-sightedness of banks as they were overtly guided by profit-making interests.

NRB has projected that 20 per cent credit growth of private sector would be needed to achieve the 6.5 per cent growth targeted by the fiscal policy. However, credit expansion of banks is close to the target within six months, Siwakoti said.

What is worrying, though, is that the areas where loans were floated were primarily ‘risky’. As per Siwakoti, banks are largely focused on short-term and high profit-oriented sectors like hire purchase, real-estate, home loan, margin lending and overdraft.

“Banks are not exploring credit demand in the productive sector, which is necessary to stimulate the economy,” he added.

Bankers also admit that some institutions went on a credit expansion spree by ignoring slow capital expenditure of the government and slow remittance growth. “Banks pushed ahead with expanding credit in the second quarter despite slowdown in deposits, which resulted in shortage of liquid funds to disburse loans,” said Pandey.

Commercial banks have expanded credit of around Rs 204 billion in the first half of this fiscal against deposit collection of Rs 155 billion. As banks scramble to arrange funds to extend fresh loans, the inter-bank rate, which stood at around one per cent at the end of last fiscal (mid-July 2016) has risen to nearly seven per cent at present.

Reportedly, 21 commercial banks out of 28 have already breached the CCD ratio and NRB is planning to take necessary action against them if they do not adopt corrective measures promptly.

NRB has been closely watching the situation and providing short-term remedies to BFIs through prevailing tools, according to Siwakoti. “NRB is providing standing liquidity facility and purchasing government securities from banks at higher interest rates. But we can’t compromise on prudent regulatory practices to extend more favours.”

However, bankers also blame the current situation on the government’s low spending capacity. According to Pandey, crucial loans like payment of letter of credit and others might be affected in the coming days if the government’s expenditure is not accelerated.