Nepal | July 19, 2019

Bank credit outpaces deposits

Pushpa Raj Acharya

Lending dataKathmandu, October 25

There has been rapid credit expansion through banks and financial institutions (BFIs) from the beginning of this fiscal as a majority of them are in a rush to meet the paid-up capital requirement by the end of this fiscal as provisioned by the Nepal Rastra Bank (NRB).

As a majority of the BFIs are close to meeting the paid-up capital requirement set by the central bank, which has increased it by four folds, the BFIs have been also expanding credit aggressively. BFIs have expanded credit by Rs 54.34 billion to Rs 1,736.19 billion in the first two months of this fiscal as compared to Rs 1,681.85 billion till the end of fiscal 2015-16, according to the central bank.

“Since the BFIs have been directed to raise their paid-up capital, it is obvious that they will also expand the credit to enhance their profits,” said former NRB governor Yubraj Khatiwada.

However, the sluggish deposit growth has thrown cold water on the aspirations of the BFIs to expand the credit further. BFIs are under pressure to maintain liquidity as provisioned by the central bank at a time when credit has outpaced deposits.

According to the central bank data, deposit growth of BFIs in the first two months of this fiscal was slow due to slowdown in remittances, lack of desired spending from the government and lucrative boom in the stock market and increased opportunities to invest in real estate sector, among others.

Total deposits of the BFIs in the first two months of this fiscal increased slightly to Rs 2,108.68 billion. The total deposit till the end of last fiscal was Rs 2,085.35 billion, according to NRB.

Credit expansion in trade, agriculture, construction, services and production was encouraging. The credit expansion of BFIs is also largely backed by cheaper interest rate in the review period. But since the end of first quarter of this fiscal, the banks and financial institutions have increased the interest rate in credit stating they have to pledge high interest rate on deposits to lure depositors so that they can expand credit while maintaining the liquidity as provisioned by the central bank.

Reportedly, BFIs have increased the rate on deposits as they started facing liquidity crunch due to slow deposit growth since the beginning of this fiscal due to aforementioned reasons.

As per the provision of the central bank, commercial banks need to maintain 12 per cent of their total deposit as liquid cash. Likewise, such rate for the development banks and finance companies has been set at nine per cent and eight per cent, respectively.

A version of this article appears in print on October 26, 2016 of The Himalayan Times.

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