Kathmandu, January 22

Since the beginning of the second quarter of this fiscal year commercial banks have increased the interest rate on credit citing the high cost incurred to attract deposits. Subsequently other financial institutions also followed the lead taken by the commercial banks and increased their lending rates.

As reported by the banks they were in a tight position to manage the credit to deposit ratio as per the requirement of Nepal Rastra Bank (NRB). However, loan expansion of commercial banks in the second quarter (mid-October to mid-January) increased by 65 per cent to Rs 127 billion as compared to Rs 77 billion in the first quarter (mid-July to-mid-October) of this fiscal.

According to data unveiled by Nepal Bankers’ Association (NBA) — umbrella association of class ‘A’ financial institutions in the country — credit expansion of commercial banks had gone up to Rs 1,463 billion from Rs 1,386 billion during mid-July to mid-October and surged to Rs 1,590 billion from Rs 1,463 billion during mid-October to mid-January. However, deposit collection increased by Rs 71 billion in the first quarter and by Rs 84 billion in the second quarter of this fiscal.

It looks like banks are more focused on expanding credit to take advantage of increased interest rate on credit to ensure high profit. To secure high profit, credit expansion of commercial banks has been highly centred on unproductive and risky areas. The central bank’s recent Macroeconomic Outlook report alerted banks and financial institutions (BFIs) that their move to focus on unproductive sectors is an inherently risky strategy and it might raise the size of non-performing loans and ultimately BFIs will lose profit as they have to allocate more funds for loan loss provisioning.

In the first half of the current fiscal year, credit expansion of commercial banks increased by around 15 per cent to Rs 204 billion, which does not tally with the country’s economic growth.

According to Yubaraj Khatiwada, former governor of NRB, to achieve economic growth of five to six per cent credit expansion has to grow by 20 to 22 per cent. If the credit expansion in the second half of the fiscal increases at a similar pace like in the first half then there will be more credit expansion than required to achieve the targeted 6.5 per cent growth. This means that BFIs have been creating artificial credit demand than sought for by the economy.

The recent Macroeconomic Outlook report of the central bank has flagged credit flow towards unproductive and risky areas like personal over draft, hire purchase, real estate, margin lending and others. Credit expansion to the unproductive sector has increased substantially from last fiscal, said the NRB’s recent macroeconomic outlook.

After the central bank came up with the policy for financial institutions to raise the paid-up capital requirement, credit by the BFIs to the unproductive sector has increased significantly, as per analysts. NRB had given BFIs two years to increase the capital by four folds through monetary policy of 2015-16.

During the period of one year and five months, credit under overdraft heading increased by Rs 90 billion and a large chunk of the credit issued as personal overdraft is suspected to have been invested in the real estate sector. Credit under the real estate heading increased by Rs 33.32 billion in the review period, which has backed the boom in real estate business. Likewise, credit under margin lending (loan against collateral of stock) has expanded by Rs 14.26 billion in the review period, as per the central bank’s report. Similarly, BFIs have floated Rs 40.39 billion and Rs 55.31 billion as home loan and hire purchase credit, respectively.

Despite the high risk associated with the aforementioned sectors, BFIs are floating loans in these areas as they believe that they will earn higher profits from short-term lending. Banks are under pressure to earn more profit after the central bank’s decision to increase their paid-up capital requirement. Capital increment policy of the central bank has created pressure on BFIs to expand credit to earn a similar level of profit like in the previous years.