Rs 112 bn loanable funds sitting idle

Kathmandu, December 30

Over Rs 100 billion, which could be immediately extended as loans, is sitting idle in the coffers of commercial banks, as credit demand in the country has failed to pick up due to the unfavourable economic condition.

Cash is piling up in the vaults of 30 commercial banks operating in the country because of the rise in the flow of money sent by Nepalis working abroad.

In the first four months of the current fiscal year alone (mid-July to mid-November), the country’s

remittance income surged by 19.4 per cent to Rs 215.39 billion.

This has pushed up deposit level at banks to Rs 1,531 billion as of December 18, show the latest data of Nepal Bankers’ Association (NBA).

Of the total deposits parked at banks, Rs 1,423 billion is in local currency and the remaining Rs 108 billion is in foreign currency.

NRB allows banks and financial institutions to extend up to 80 per cent of the sum of core capital (capital fund) and total local currency deposit as loans.

The capital fund of commercial banks stood at Rs 149.69 billion as of mid-November. On the other hand, local currency deposit of these Class ‘A’ financial institutions hovered around Rs 1,423 billion as of December 18. This puts the sum of capital fund and total local currency deposit at Rs 1,572.69 billion.

This implies commercial banks can convert at least Rs 1,258 billion — 80 per cent of Rs 1,572.69 billion — into credit.

But as of December 18, only Rs 1,146 billion was extended in loans.

This means banks are sitting on top of a whopping Rs 112 billion in funds that could be issued as credit.

Inability to convert such a huge amount of funds into loans adds up to the cost of banks because they make a huge chunk of income by selling money bought from clients in the form of deposit.

Lately, there has been a slowdown in the pace of extension of loans because of deteriorating economic condition as a result of earthquakes of April and May, and blockade on Nepal-India border points. These factors have reduced trade volume and imports of capital goods, raw materials and petroleum products, which in turn have severely hurt various industries.

“As demand for loans is falling, banks have reduced credit rate to as low as six per cent,” said NMB Bank CEO Upendra Poudyal.

Average lending rates of commercial banks stood at 9.47 per cent in mid-November.

While lower credit rate is good news for borrowers, the problem is lack of demand for loans in the productive sector.

“This has raised the prospects of credit flowing into unproductive sectors, such as stock market and real estate, because loans have become relatively cheaper,” said Poudyal, who is also the NBA president.

With the drop in credit rate, deposit rates are also expected to go down, which is not good news for people who have parked or are intending to park money in banks.

“But there is not much room for us to reduce deposit rates because they are already at a very low level — albeit reduction of 0.5 percentage point cannot be ruled out,” said Poudyal.

Average deposit rate of commercial banks stood at 3.52 per cent in mid-November.

If this deposit rate is compared with 10.4 per cent hike in consumer prices in November, it could be said real deposit rate is in negative terms. “This has raised the spectre of capital flying from the country,” said Poudyal, adding, “The only way to address this problem is by increasing public spending, as it would increase demand for loans and

correct interest rates.”