‘Hiking deposit rates is not the only way to collect resources’

Lack of loanable funds has been a recurring problem in the banking sector since the past few years. Failure to address this perennial problem has not only promoted interest rate war among banks and financial institutions, but has also made the financial sector unstable. Consequently, this instability has not only been impeding the growth in investments but also the growth of the entire economy. In this context, Sujan Dhungana of The Himalayan Times spoke to Anupama Khunjeli, chief executive officer of Mega Bank Nepal, to know details on the aforementioned issues. Excerpts:

Though credit crunch has been a recurring problem in the banking sector, financial institutions have not been able to find any concrete solution to address it. Why is it so?

Looking back at history we can see that banks have flourished even during difficult periods. However, in the past two to three years banks have been facing a crisis of loanable funds time and again. I believe that the demand for loans has increased following the political stability in the country and banks have been looking to manage necessary resources. As of today, all the banks have raised their paid-up capital to Rs eight billion from the earlier Rs two billion provision. As a result, the banking sector’s appetite for growth has increased within a short span of time. In fact, there is a Rs 700-billion growth capacity because of the enhancement in the capital structure of commercial banks. Along with this enhancement in the capital and their capacity, banks are trying to grow as fast as possible today. Most of the banks are close to the credit to core capital and deposit (CCD) ratio threshold and we have been observing that lending growth has been faster than deposit growth. As all the banks are close to touching the CCD threshold, deposit growth in banks has been much higher than lending growth in the past two months. What we have to realise is that we will not be able to expand loans until we are able to collect ample deposits.

Though banks have been lobbying for increment in the CCD ratio to fulfil their deposit requirements, banks could attract deposits worth only a few billions. Is this enough to address the credit crunch situation?

This is a short-term solution as increasing the CCD ratio to 85 per cent will cater to our requirements for only a few months. Usually, the international banking sector does not look into the CCD ratio of banks. However, as the banking sector in Nepal is growing at a rapid pace, the central bank has taken the CCD measure into consideration. I feel that only addressing the CCD provision will not help banks solve the problem of resource collection. First and foremost, banks should ensure that they can generate enough resources so as to be able to expand loan portfolio. The other measure could be borrowing funds from abroad. Though a few banks have opted for the latter option, it is turning out to be a pretty expensive measure. In this context, I believe that the government should look into the prospect of special drawing rights (SDR) and get funds at a cheaper rate and give it to commercial banks for a few years as the banks have been witnessing high demand for loans. Banks could opt for foreign borrowing but as we lack a sovereign rating from an internationally credible rating agency it will be difficult for us to borrow funds from abroad at a cheaper rate. Whenever, any international financial institution wants to lend funds to us they will first look into the financial strength of the country. So, unless we are rated well in the international market, we will not get funds at a cheaper rate. Similarly, if the government spends its capital expenditure evenly throughout the year then banks will be able to expand its credit portfolio as there will be funds available in the market. Since the government usually spends only towards the end of the fiscal year banks increase their loan portfolio in the first three months of the next fiscal. Timely spending by the government will ensure even distribution of credit throughout the year. An even distribution of credit throughout the year will ensure stable growth of the market. Currently, all banks are loading their risk asset books in the first three months and remaining quiet for another few months.

Low spending of the government has been a historical problem. So, why haven’t banks adopted other strategies to cope with this issue?

We have been trying to resolve this issue. Nepal Bankers’ Association has formed a committee in coordination with the Ministry of Finance and Nepal Rastra Bank to look into the issue. However, we have not been able to resolve the issue as yet. We will be holding further discussions to come up with a plausible solution.

Though the government is promoting credit in the productive sector, credit growth in the unproductive sector is still high comparatively. Why is it so?

The central bank has regulatory provisions regarding credit disbursement in the productive sector and in the case of Mega Bank, we have fulfilled all the regulatory requirements. Moreover, all banks should comply with the regulatory requirements of the central bank on credit flow in different sectors. In fact, I think all banks have complied with the central bank’s requirement.

Amid banks and financial institutions diversifying their credit portfolio, Article IV Mission of the International Monetary Fund has suggested tightening the credit flow. What is your comment on this?

We have now started adopting the Nepal Financial Reporting Standards (NFRS) accounting system. The central bank has come up with risk-based audit and banks are also following the international standard of auditing. We are heading towards making our organisations secure to make sure that we are capable of building quality risk asset books. The central bank has started monitoring banks on the basis of international standard. All commercial banks have to realise that we will have to upgrade our risk policy if required. This is necessary in the banking sector as we are utilising public money. If we do not ensure that we are lending in the proper sector, the entire financial sector will be in problem. The major role of banks is to enhance the trust of five stakeholders — promoters, regulator, customers, human resources of the bank and the society at large.

The private sector is worried about the interest rate volatility in recent years. What is your take on this?

The government and the central bank have been foreseeing problems in the financial sector and taking measures to address them early on. We have been observing interest rate volatility in the market since the past few years. However, it should be noted that the government, the central bank and commercial banks have been working on detecting such problems as early as possible and taking immediate measures. The recent recommendation of the study carried out by experts to ensure financial stability is the outcome of the tripartite discussion. Commercial banks have today realised that hiking deposit rates is not the only way to collect resources. We have to make sure that economic growth is sustainable and inflation is under control. However, volatility is inevitable in the market. But it is important that such volatility is curtailed on time and their impacts minimised. Commercial banks, along with the government and the central bank are aware of these facts.