Aggressive lending against sluggish deposit collection since the beginning of this fiscal has resulted in acute shortage of loanable funds in banks and a majority of them have halted loan disbursement since the third quarter (mid-January).

Almost all banks are on the verge of crossing the credit to core capital cum deposit ratio of 80 per cent, as allowed by Nepal Rastra Bank. The central bank has been expressing concerns about the rampant lending of banks to the unproductive sector because loan growth to the unproductive sector is relatively high as compared to productive sector. Cash-strapped banks are seeking NRB’s support through refinancing facility for long-term lending and are also urging the government to ramp up capital spending so that deposit collection of banks can increase and the current problem can be resolved. NRB has been trying to resolve the situation through open market operations.

However, bankers say that the problem cannot be resolved until government spending rises or NRB provides long-term refinancing facility. Pushpa Raj Acharya of The Himalayan Times caught up with Chinta Mani Siwakoti, Deputy Governor of NRB, to learn how the current crisis could be resolved.

Banks are facing acute shortage of loanable funds and have halted disbursement of even loans that they had already committed to their borrowers. Why didn’t the central bank take any corrective step when loan growth of banks was skyrocketing despite slow deposit growth in the second quarter of this fiscal?

It is clear that the banks were not cautious of the situation because deposit collection was sluggish since the beginning of this fiscal as remittance growth remained stagnant and capital expenditure was slow. The current crisis is due to lack of loanable funds in banks because banks cannot lend more than 80 per cent of the sum of local currency deposit and core capital, which we call CCD (credit to core capital cum deposit) ratio. However, almost all commercial banks are about to exceed CCD ratio. The intention behind fixing CCD ratio is to safeguard banks from systemic risks due to liquidity crisis but as of now 21 out of the 28 commercial banks have exceeded CCD ratio. They have breached the central bank’s regulation as they were focused on expanding loans to earn high profit so that they could ensure dividends for their promoters.

You have mentioned that a majority of banks have breached NRB’s regulation on CCD ratio. Why has the central bank not taken any action against them?

We have already warned banks they will be penalised if they fail to maintain CCD ratio of below 80 per cent by end of the third quarter. NRB has asked them to use all available options to attract more deposits and focus on recovery of loans and also seek other available options to maintain CCD ratio. You may have noticed that banks have already started raising interest rate on lending and there have been lots of complaints at NRB that banks are raising interest rates on loans by 0.5 to one percentage point every fortnight. To rationalise their decision to raise interest rate on loans, banks have also been increasing interest rate on fixed deposits, which contributes only around nine per cent of the total deposits. Since banks started offering high interest on fixed deposits only recently, there has not been much impact of high cost deposits on the cost of fund of banks. Banks were enjoying low interest rate deposits since the last half decade due to flush liquidity in the market. And even now when they are passing through severe crunch of loanable funds banks seem reluctant to increase interest rate on savings deposit. It is obvious that the interest rate is guided based on the market situation but the central bank wants reasonable and predictable interest rates. For sound economic growth and better returns for depositors we expect five to six per cent interest on deposits and 10 to 11 per cent interest on lending. We do not want the interest rate on deposits to remain low and borrowers to get cheaper credit because it will ultimately raise inflationary pressure in the economy. This is why in the previous years the central bank invested a lot of funds to pay interest rate on reverse repo to banks because the interest rate on deposits was almost nil despite higher inflation due to flush liquidity in the market. In the last fiscal alone, NRB invested around Rs 900 million to pay interest on reverse repo to the banks so that depositors could benefit. When NRB mopped up the flush liquidity it prevented the chances of cheaper loans being floated to borrowers as well.

Bankers have been saying that NRB has raised paid-up capital of banks which increased the lending capacity of banks. However, like in previous years the central bank has set a target of 20 per cent credit growth in Monetary Policy 2016-17 even after the capital increment. Why is NRB so conservative about credit growth?

If we look at the trend of credit and deposit growth of the last five years, on an average, there has been 19 per cent credit growth every annum against 20 per cent deposit growth. While setting the credit growth target the central bank cannot assume higher lending growth in isolation to deposit growth. Deposit also needs to be increased at the same pace. On the other hand, if we analyse the demand from the productive sector, average demand growth of credit hovers around 10 to 12 per cent. In some sectors like agriculture and hydropower, NRB has issued a special directive to the banks to lend a certain per cent of their respective loan portfolio. But the circumstances of lending growth in this fiscal are quite different because credit expansion skyrocketed to 34 per cent during mid-November to mid-December. The central bank closely monitored this lending growth and found banks floating loans in real estate, hire purchase, home loan, margin lending and over draft, among others. Banks are focusing on short-term high-profit oriented sectors but these might bring risks. These areas are identified as ‘risky’ and if loans are defaulted, there will be a negative impact in their balance sheets because they have to allocate funds from their profit for loan loss provisioning. Banks should retrospect on their lending pattern and correct them as they have invited this problem due to rampant lending in risky areas.

NRB’s data reveal that lending in every ‘risky’ sector/portfolio is below the ceiling set by the central bank. Yet, banks are running out of funds to lend. Is it that banks have found new ways to finance real estate and stock market sectors, which are not included under these headings?

NRB has both onsite and offsite inspection mechanisms and if banks are found disbursing loans to risky areas through other headings they will be penalised. Whenever we have found any bank increasing credit to the ‘risky’ areas we have promptly flagged off those banks that this move is wrong and it may invite another disaster to the financial system. I think banks have not been doing so because they have learned a lesson from the global financial crisis and the real estate fiasco here in Nepal itself some six years back.

You mentioned there has been aggressive lending by banks and a chunk of credit is directed towards less productive sector. Why did it take so long for NRB to caution banks about their lending practices? Doesn’t this mean that the central bank’s monitoring and supervision mechanism is weak and ineffective?

I do not want to enter into a blame game but the fundamental aspect of this problem is related with aggressive lending. It has shown the inefficiency of banks because they failed to plan even for the short term. They were aware of the slow remittance growth and low government spending because remittance and government spending are the major sources for deposits. Despite all these circumstances, banks continued with their credit expansion spree. I do not think it happened due to any regulatory and supervisory inefficiency of the central bank.

Bankers are seeking long-term refinancing facility from NRB and have also requested it to lobby with government to deposit the funds allocated as second tranche for the earthquake victims in banks. But NRB has not provided any practical support to the banks to cope with current challenge?

NRB has been providing window of standing liquidity facility (SLF) worth Rs 180 billion and outright purchase sale to the banks to cope with current challenge. In this fiscal, banks have taken SLF worth Rs 41 billion. Likewise, we have been injecting liquid funds in the banks by purchasing government securities held by them at an interest rate higher than what they purchased at. We are also planning to lower cash reserve ratio (CRR). For refinancing facility, there is already a window of one-year refinancing facility and banks can utilise this facility for up to 25 per cent of their core capital. We have fund of Rs 11 billion to provide refinancing facility to the banks but it has not been used. Banks have been lobbying with the government to expedite capital spending and seeking funds allocated for second instalment of individual housing grant to the quake victims as deposits until the grant is distributed. The central bank as an economic adviser to the government can recommend adopting such option but it is up to the government to either deposit the allocated amount to the banks or not. But banks have not taken up other simpler available options like raising interest rate on savings accounts and are just making a hue and cry.

You mentioned that revision of CRR is an option on the table. Are you planning to adopt this measure during the mid-term review of monetary policy so that additional funds can be freed up for banks to lend?

The central bank may revise CRR as an option to ease the liquidity situation in banks during the mid-term review of the monetary policy. On the other hand, we have to gradually enforce the provisions of the Financial Sector Development Strategy (FSDS) that was recently endorsed by the government. The FSDS has envisaged to increase financial literacy, access to finance, expand outreach of financial services, and narrow down the spread rate (gap between interest on credit and deposit), among others. The central bank will focus on execution of FSDS in the coming days.