Central bank revises monetary policy

Kathmandu, February 21

The current situation of credit crunch being witnessed in the financial system is likely to ease as Nepal Rastra Bank (NRB) — the central regulatory and monetary authority — has relaxed the method to calculate the credit to core capital cum deposit (CCD) ratio in the revised Monetary Policy of the current fiscal.

Unveiling the mid-term review of the Monetary Policy 2016-17 in the Capital today, NRB offered some respite to commercial banks in CCD calculation. As per the provision, banks can deduct 50 per cent of their total exposure to the productive sector in CCD calculation at the end of this fiscal.

The CCD ratio is calculated by dividing loans disbursed in local currency by the sum of local currency deposit and core capital. As per the revised provision, banks can now deduct 50 per cent of the loan amount disbursed to the productive sector from the total disbursed loan. This outcome is then multiplied by 100 and it should not exceed

80 per cent.

It is reported that commercial banks’ lending to the productive sector hovers around Rs 254 billion. “As banks have been granted facility to deduct 50 per cent of the loan portfolio to the productive sector, there will be space of Rs 127 billion for lending from current lending level,” according to NRB Governor Chiranjibi Nepal.

“This provision will motivate banks to float loans to the productive sector because those banks which have larger loan portfolio to the productive sector will better enjoy the facility extended by the central bank.”

Through this intervention the central bank has supported the banks and financial institutions to meet the target of productive sector lending set by NRB. Class ‘A’, class ‘B’ and class ‘C’ financial institutions have to mandatorily float 20 per cent, 15 per cent and 10 per cent of the total loan portfolio to the productive sector, respectively. Moreover, class ‘A’ banks have to lend 15 per cent of the productive sector lending to the agriculture and energy sectors.

“The central bank has brought this policy in view of the resource crunch in productive sector lending as loan expansion to productive sector is weak as compared to lending to the unproductive sector,” said Governor Nepal. “Growth of the productive sector should not be affected due to lack of required credit.”

Far from the assumption of the central bank, private sector credit has expanded by 30.9 per cent in the first half of this fiscal. The Monetary Policy had initially estimated that credit growth to private sector would grow by 20 per cent this fiscal.

However, the revised monetary policy has applied the brakes on auto loans and personal overdrafts, which are considered unproductive sectors. The revised monetary policy has lowered the maximum threshold of personal overdraft by 25 per cent to Rs 7.5 million from Rs 10 million. Henceforth, banks will not be allowed to issue personal overdraft of above Rs 7.5 million and those that have already been issued need to be lowered to the given limit by the end of this fiscal. This provision will also create space for loanable funds, according to Nara Bahadur Thapa, executive director of NRB. Currently, banks and financial institutions have issued Rs 286 billion as overdraft facility.

Taking into account the rampant lending of banks and financial institutions, NRB has asked the banks to report on their CCD ratio every week. In the mid-term review programme, Governor Nepal said that six commercial banks may face action as their CCD ratio has exceeded the permissible level since long.

To discourage multiple banking, those availing credit worth Rs one billion and above from multiple financial institutions have to convert such practice to consortium financing. If banks and financial institutions fail to do so, such credit will be categorised under ‘watch list’ in the last quarter and concerned banks and financial institutions will have to allocate five per cent of the total loan amount as loan loss provisioning.

However, the central bank has provided relaxation to commercial banks on direct lending (two per cent of the total loan portfolio) to the deprived sector as they will not be penalised if the given target is not met in this fiscal. But they have to meet given target from next fiscal.

Bankers have hailed the provisions of the revised monetary policy. “It has created enough space for banks to float loans,” said Bhuvan Dahal, CEO of Sanima Bank, adding, “Banks have to be prudent while disbursing loans in coming days because the central bank has extended this facility only till the end of this fiscal.”

Interest on savings accounts must not be less than call deposit rate

KATHMANDU: Depositors of banks and financial institutions (BFIs) now have something to cheer about as Nepal Rastra Bank (NRB) has introduced a provision that the interest on savings accounts must not be less than call deposit rate. Currently, banks have been quoting six to nine per cent interest rate on call deposits, however, interest rate on savings accounts is merely two to three per cent. Once this provision comes into effect after NRB issues a circular to BFIs, interest rate on savings accounts will rise. Savings deposit has around 42 per cent weightage of the total deposits, but such depositors were deprived from availing rational interest rate, according to NRB officials. “There is a trend to place call deposits from relatives of the board of directors and promoters and near and dear ones of the management and providing high interest rate to them,” said Nara Bahadur Thapa, executive director of NRB. “NRB wants to discourage this trend, so from now onward BFIs have to either reduce the interest rate on call deposits or raise the interest rate on savings deposits or bring both the rates to the same level.”

‘Credit crunch not due to rights issue and FPO’

KATHMANDU: Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal has refuted claims that the current credit crunch is due to the huge rights issue and further public offering of banks and financial institutions (BFIs) to meet increased paid-up capital requirement by the end of this fiscal as per deadline given by NRB. Only a few weeks back, NRB Deputy Governor Chinta Mani Siwakoti admitted that the central bank had made a mistake while opening all the options like merger and acquisition, further public offering (FPO), rights issue and others for banks to increase paid-up capital and opined that the credit crunch could have been prevented if the central bank had introduced a provision to verify the source of income of promoters to invest in rights shares issued by BFIs to raise paid-up capital. Siwakoti alleged that promoters of BFIs were obtaining loans from other banks to invest in rights shares of banks they promote. However, Governor Nepal today said rights shares worth only Rs nine billion and FPO worth Rs five billion were issued by BFIs in this fiscal. “The hue and cry of rights issue and FPO is baseless,” said Governor Nepal.