NRB clarifies on inter-bank deposits in CCD ratio calculation

Kathmandu, August 24

Nepal Rastra Bank (NRB) — the central regulatory and monetary authority— has clarified that banks and financial institutions cannot factor the inter-bank deposits in credit to core capital cum deposit (CCD) ratio only in cases where the inter-bank borrowing is again placed as deposit in the same financial institution.

The central bank had issued clarification as the commercial banks have lowered the interest rate on deposit of development banks and finance companies to almost zero following the unified directives issued by NRB last week, which prevented banks and financial institutions to factor interbank deposit in CCD calculation. A large chunk of deposit of development bank and finance companies was withdrawn following NRB’s rule on CCD calculation.

As per NRB Spokesperson Narayan Prasad Paudel, the central bank has included the provision in unified directives with an objective to prevent banks and financial institutions (BFIs) from accepting the funds as deposit from the financial institutions with whom it already has inter-bank transactions.

BFIs can lend only 80 per cent of sum of core capital and deposit. Of the remaining 20 per cent, they maintain liquid cash and invest in government treasuries. However, due to high operational costs, development banks and finance firms cannot compete in terms of rates while bidding for government bonds. Due to this, class ‘B’ and ‘C’ financial institutions vie to maximise their idle funds through interest income in deposits.

Commercial banks have lowered interest on deposit considering such deposits as inter-bank deposit. But now NRB has clarified that banks can factor inter-bank deposit in CCD calculation except when the inter-bank borrowing is again placed as deposit in the same financial institution, as per the circular issued today.

This clarification has provided a major relief for commercial banks as most of them are close to reaching the permissible CCD ratio.

Currently, BFIs have inter-bank deposit of over Rs 70 billion and a large chunk of this deposit is parked at commercial banks. The inter-bank deposits have helped commercial banks to be in a comfortable position in terms of CCD.

Earlier, the central bank had relaxed the CCD calculation provision, with the BFIs allowed to deduct 50 per cent of the loan floated in productive sector in CCD calculation through half yearly review of monetary policy of last year. The central bank is going to remove the relaxation by mid-October this year and the banks are under pressure to maintain the CCD ratio at permissible 80 per cent.

The central bank’s clarification on inter-bank deposit has also minimised the chances of further rise in interest rates as the average CCD of commercial banks is around 77 per cent and the banks have loanable funds of around Rs 70 billion, according to bankers.

Nevertheless, a few commercial banks have crossed the permissible CCD ratio due to their rapid loan expansion against slow deposit mobilisation in last fiscal and they had offered relatively high interest rates on inter-bank deposits.