Kathmandu, February 8

Concluding that banks and financial institutions have breached prudent banking practices, Nepal Rastra Bank today summoned the heads of Nepal Bankers’ Association, Development Bankers’ Association and Finance Company Association and directed them to take corrective action or face the music.

At a time when bankers are lobbying for an upward revision of credit to core capital-cum-deposit ratio to cope with the ‘credit crunch’ the NRB made it clear no such revision would be made.

Going by the book, banks can float up to 80 per cent of the sum of total deposit and core capital of individual banks as loans. A majority of banks have exceeded the permissible CCD ratio, as their loan expansion outpaced deposit collection in the first half of this fiscal. Sorely lacking funds to extend more loans, banks had been lobbying for upward revision of CCD to 82 per cent.

The central regulatory and monetary authority also expressed concerns about the rampant hike in interest rate on loans, which has breached the interest rate spread of five percentage points. As per regulation, the difference of interest on loan and deposit should not exceed five percentage points. While BFIs started charging borrowers high interest rate citing high cost of deposits in recent months, the weighted average interest rate on deposits has increased only marginally, according to NRB officials.

Central bank has been repeatedly flagging off the BFIs regarding their inefficient planning in loan expansion, concentration of credit to the unproductive sectors and interest rate rise.

The central bank also expressed concerns about the rampant expansion of auto loans. Ignoring the norms of loan-to-value ratio, which is in practice in home loan, real estate loan (50 per cent of fair value) and loan against collateral of stocks (60 per cent), banks have been found to be financing up to 90 per cent of the value of automobiles. As BFIs have been floating higher amount of loan for purchase of automobiles by capitalising on the lack of central bank regulation, NRB may soon fix the LTV ratio for the auto loans as well.

During the meeting today, NRB Governor Chiranjibi Nepal told the heads of the associations of class ‘A’, ‘B’ and ‘C’ financial institutions that the central bank has been closely monitoring every individual BFI that is not abiding by the NRB’s rules and regulations.

The governor also told presidents of the three associations that NRB would not revise the capital increment requirement for BFIs and reminded them that the deadline set for this fiscal year-end was drawing near. According to NRB, five commercial banks and many class ‘B’ and ‘C’ financial institutions may not be able to achieve the capital increment target given by the central bank and those who miss deadline will be penalised.

Presidents of the associations did not respond to repeated requests for comment.