Bankers may be using the inter-bank window to meet general borrowers’ credit needs. If this is the case, banks are taking a lot of risk

Kathmandu, February 10

Commercial banks have been lending money to other commercial banks at an average rate of up to 6.4 per cent in recent weeks. The surge in inter-bank lending rate, which stood at below two per cent before December 27, has prompted the central bank to intervene, offering funds at rates little above five per cent. Surprisingly, there are very few takers of cheaper funds provided by the Nepal Rastra Bank.

Why are banks giving the cold shoulder to cheaper funds provided by the NRB and borrowing money from other institutions at higher rates?  The answer lies in the central bank directive issued on December 26, which allows banks and financial institutions to treat credit obtained through the inter-bank window as deposit to meet the credit to core-capital-cum-deposit ratio.

Banks and financial institutions must maintain CCD ratio of 80 per cent, meaning for every Rs 100 of core capital and deposit, loan disbursement should not exceed Rs 80. The average CCD ratio of commercial banks hovers around 78 per cent. This implies banks have only around Rs 50 billion for credit disbursement.

Since the CCD ratio is close to the ceiling of 80 per cent, banks are rapidly using the inter-bank facility to shore up their credit disbursement capacity. This has raised the eyebrows of NRB, as it fears bankers may be using the inter-bank facility to provide credit to customers.

Inter-bank rates, which are high if viewed through the NRB lens, are still lower than deposit rates. The Nepal Bankers’ Association, which is operating as a cartel, has capped savings deposit rate at 6.5 per cent per annum and fixed deposit rate at 9.75pc.

“This difference in inter-bank and deposit rates may have tempted bankers to use the inter-bank window to meet general borrowers’ credit needs,” said Nara Bahadur Thapa, executive director of Public Debt Management Department of Nepal Rastra Bank. “If this is the case, banks are taking a lot of risks.”

This practice of using the inter-bank window to cater to borrowers’ demand is risky because the maturity period of inter-bank loans is very short -- seven days to be precise, although they can be rolled over. On the other hand, credit that banks extend to general borrowers is long-term in nature -- at least five to seven years on average.

“Banks generally have long-term assets (or loans) funded by short-term liabilities (or deposits). But inter-bank loans mature in a very short time and are not ideal instruments to boost lending. Banks should thus be careful,” warned Thapa. This, however, does not mean all 28 commercial banks are using this technique to enhance their credit disbursement capacity. Data of the past few days show only around five banks are actively resorting to this practice. But what is worrying is volume of loans these institutions are getting through the inter-bank window. Per day inter-bank transaction volume has crossed Rs 10 billion mark at least four times in the last 19 days, which was quite rare in the recent past.

Concerned about soaring inter-bank transaction volume and subsequent hike in inter-bank lending rates, which tend to jack up general lending rates, the central bank has tried to inject Rs 45 billion in the banking sector through seven repo auctions since January 20. The money was offered at rates anything above five per cent. Yet only Rs 21 billion, or 47 per cent of the offered amount, was absorbed by banks.

“The uptake was not as per our expectation because money offered through repo auctions cannot be used to adjust CCD ratio,” said Thapa. This, according to Thapa, proves inter-bank transactions are taking place to prop up lending capacity rather than to meet the primary objective of maintaining cash reserve ratio, or the portion of the deposit that banks must park at the central bank.

“If banks are using inter-bank loans to make up for up to one percentage point of the CCD ratio, it can be considered a smart move. But anything beyond that can be risky,” said Sanima Bank CEO Bhuvan Dahal.