Nepal | November 13, 2019

Banks unable to provide credit as liquidity crunch prolongs

Pushpa Raj Acharya

Kathmandu, November 17

Banks have been floating only a small amount of loans and are mulling over halting credit disbursement due to lack of funds in their vaults. Known as ‘liquidity crunch’, the situation has occurred as the money has piled up in the government’s coffer and expenditure is very low.

According to the latest update of Nepal Rastra Bank (NRB), Rs 193 billion has piled up in the government’s treasury.

Banks were collecting money from depositors at low interest rates till the beginning of this fiscal and had expanded credit rapidly in the first quarter of this fiscal. However, they failed to attract deposits at the same pace as compared to the amount of loan they floated during that period.

Credit-to-deposit ratio or CD ratio of a majority of commercial banks is close to 80 per cent and there is no further space for them to expand credit without attracting more deposits. As per NRB’s regulation, commercial banks need to maintain CD ratio at 80 per cent.

Commercial banks have raised interest rates for deposits as well as loans from the second quarter of this fiscal, but deposit growth has not been encouraging. Thus, banks have started facing a challenge to maintain the CD ratio, according to Bhuvan Kumar Dahal, CEO of Sanima Bank.

In this context, banks have started competing among themselves by offering higher interest rates to attract deposits. Some banks have started quoting seven per cent interest rate for fixed deposits of six months and the interest rate being offered to institutional depositors has also gone up.

Banks have been seeking deposits by offering higher interest rates not to disburse loans but to maintain CD ratio, wary about money being withdrawn by depositors to pay the first instalment of income tax that needs to be filed by next month.

“Around Rs 40 billion is expected to be withdrawn from the banking sector to file the first instalment of corporate and individual income taxes. This will push the commercial banks to a tight spot regarding maintaining CD ratio even if they are able to increase deposits by Rs 40 billion within a month,” said Ratna Raj Bajracharya, CEO of Sunrise Bank.

“The operating cost of commercial banks will further increase in the coming days if the current situation prolongs because they have to give higher returns for deposits but there will not be any credit expansion, from where banks earn.”

Interest revenue is the major source of income for banks, which will be affected if the government’s expenditure is not increased substantially in the coming days.

“If the government’s expenditure increases, the situation will normalise and banks will be able to obtain deposits at comparatively cheaper rates,” as per Bajracharya.

As credit expansion has been sluggish since the second quarter of this fiscal, it is sure that the profit of commercial banks will take a hit till the time the liquidity crunch continues.

“Aspiration of banks and financial institutions to achieve high profit as their paid-up capital needs to be increased by up to four folds by the end of this fiscal also contributed to acceleration of credit growth in the first quarter,” explained Dahal of Sanima Bank.

On the other hand, sluggish credit growth will directly hit the government’s target of 6.5 per cent economic growth.

“We have proposed that the government provide the funds that have piled up in the state coffers to the banks as deposit,” said Dahal, adding, “If the government’s expenditure is not increased, banks cannot disburse further loans.”


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