Bankers concerned about direct lending to deprived sector policy

Kathmandu, July 17

Executives of commercial banks — class ‘A’ financial institutions — at an interaction on the Monetary Policy 2016-17 organised here, today, have expressed concern over the provision of direct lending to the deprived sector citing it will increase the operation cost of the banks.

The recently launched Monetary Policy 2016-17 has provisioned two per cent direct lending to the deprived sector through the own capacity of the commercial banks, out of the five per cent of the total loan portfolio to the deprived sector.

Commercial banks had been lending through microfinance institutions (MFIs) — class ‘D’ financial institutions — to maintain deprived sector lending target of five per cent set by Nepal Rastra Bank (NRB) until last fiscal. As per the recent provision of the monetary policy, commercial banks have to lend around Rs 28 billion directly (based on the recent lending level) to the deprived sector. On an average, one commercial bank has to lend around Rs one billion to the

deprived sector.

During the interaction, organised by Nepal Bankers’ Association (NBA) — umbrella body of class ‘A’ financial institutions — its past president Sashin Joshi said that commercial banks will now have to establish additional networks dedicated to deprived sector lending. As per Joshi operation cost of commercial banks will rise as they have to recruit over 2000 employees and establish branch networks in rural areas to implement this provision.

Former president of NBA Rajan Singh Bhandari stated that the provision was a ‘regressive move’ of the central bank. “MFIs are specialised in deprived sector lending and we have been working with them since long, so this move has disappointed the MFIs too,” said Bhandari. “Each category of financial institutions has its speciality and working areas and we expect the NRB to come up with flexible procedures in implementing this provision while issuing the unified directives.”

As the central bank is going to implement the counter cyclic buffer of up to 2.5 per cent on top of the existing

capital adequacy ratio of 11 per cent, it will have an impact on the lending capacity of the banks. “NRB can fix any rate from 0 to 2.5 per cent as counter cyclic buffer on top of the existing capital adequacy ratio,” said Joshi, adding, “So, there will be contraction in credit expansion if the central bank introduces a higher rate of counter cyclic buffer.”

Bankers also said that NRB has not included their suggestions to eliminate the provision of credit-deposit ratio of 20 per cent as the banks have to mandatorily maintain a liquidity ratio — the ratio between liquid assets and liabilities of a bank — of 20 per cent.

They, however, have hailed the provision of interest rate corridor mentioned in the Monetary Policy 2016-17,

and said that this move will be supportive in interest rate predictability.

Also speaking in the programme, NBA President Upendra Poudyal said that NRB has increased size of consortium loan to Rs one billion from the existing Rs 500 million whereas the bankers had requested NRB to downsize the consortium loan size to Rs 250 million.