Kathmandu, February 14

Bankers have admitted that the pressure from the Board of Directors and promoters for the higher profits following the requirement made by central bank to raise paid-up capital of banks is the root cause of acute shortage of loanable funds in the market at present.

Banks and financial institutions (BFIs) extended loan in an aggressive manner to book higher profit as per the target given by the board, bankers divulged today.

As the central bank introduced a provision in the monetary policy of 2015-16 requiring banks to increase their paid-up capital by four folds within this fiscal, the promoters of banks started pressurising the management to ensure that the profit also surged in the same rate, said Anil Keshary Shah, president of Nepal Bankers’ Association (NBA) — the umbrella association of class ‘A’ financial institutions. Hence, banks increased their loans while overlooking the deposit growth.

The central bank rule bars banks from floating loan over 80 per cent of the sum of core capital and deposit. “Almost all the banks have reached the saturation level, meaning they do not have space to expand more credit until and unless the deposit grows,” according to Shah.

Speaking in a programme titled ‘Current Challenges of Operating Business and Role of Banking Sector’ organised by Nepal Chamber of Commerce here today, Shah said that banks are now focusing on stabilising the interest rates of both credit and deposit, which have gone up due to the current ‘credit crunch’ in the banking sector, and achieving target of productive sector lending.

The class ‘A’, class ‘B’ and class ‘C’ financial institutions need to extend 20 per cent, 15 per cent and 10 per cent of their total loan portfolio to the productive sector as defined by the NRB.

“We expanded credit assuming that the government will also properly implement the budget and pie of the economy will expand, but that could not happen and now we are not in a position to justify our aggressive lending,” said Shah.

Another speaker at the programme, Krishna Raj Lamichhane, president of Development Bankers’ Association, said that the economy also needs to grow for the profit of the banks to rise.

“Banks alone cannot deliver returns to the promoters against their investment for the capital increment,” said Lamichhane, adding, “It should be supported by the expansion in economic activities as well.”

He suggested the board members and promoters of the banks to consider the situation facing the bankers and allow the management to work for financial stability because the overwhelming pressure of the board and promoters could result in creating unhealthy competition and unethical practices in the banking sector.

Meanwhile, Saroj Kaji Tuladhar, president of Nepal Finance Companies Association, said that the central bank’s strategy to reduce the number of financial institutions may affect service competitiveness in the coming days. “The dangers are evident by the fact that large banks have already started to cartel in setting interest rates,” he said, urging central bank to ensure competitive services in financial sector.

The private sector representatives in the programme expressed their dissatisfaction over the interest rate hike in credit and said such uncertainties adversely affect their ongoing projects and expansion plans.

Governor urges ‘self-regulation’

KATHMANDU: Governor of the Nepal Rastra Bank Chiranjibi Nepal urged banks to adopt self-regulation and not to deviate from the prevailing prudent practices in the financial sector.

“The current challenge is ‘lack of loanable funds’ in banks, it is not liquidity crisis,” said Governor Nepal. There is around Rs 73 billion liquidity in the financial system apart from the Rs 160 billion reserved by the banks under the cash reserve ratio (CRR), as per the governor.

Banks have fully utilised their capacity of loan expansion in the first half of this fiscal and now banks have to attract more deposits to expand loan, according to him. Loan expansion of the commercial banks was supposed to stand at Rs 124 billion in the first half of this fiscal considering that deposit collection stood at Rs 155 billion in the same period.

However, outpacing deposit growth, class ‘A’ financial institutions floated credit worth Rs 204 billion, as per Nepal.