Banking system ‘sound’ despite huge withdrawals

- Post Report, Kathmandu

Jan 17, 2018-

Withdrawal of billions of rupees from banks and financial institutions to settle income tax liabilities did not affect the liquidity situation of the banking system as drastically as feared, as interbank rates have not fluctuated much and none of the bank has so far exceeded the regulatory lending limit.

One of the barometers to gauge the liquidity position of banks is interbank rates—interest at which banks and financial institutions borrow funds from each other. Interbank rates generally go up whenever there is shortage of liquidity and falls when funds are in surplus.

Weighted average interbank rate of commercial banks—interest at which commercial banks borrow money from each other—stood at 3.01 percent on January 7, went up to 3.16 percent on January 9 and fell to 2.98 percent on Friday before closing at 3.01 percent on Tuesday.

Weighted average interbank rate of commercial banks, development banks and finance companies, on the other hand, hovered around 6 percent on January 7, fell to 4.51 percent on January 8 and rose to 4.94 percent on Sunday before closing at 4.77 percent on Tuesday.

“This is an indication that the situation is under control,” said Nara Bahadur Thapa, executive director of the Research Department of the Nepal Rastra Bank, the central bank.

Earlier, many had predicted that withdrawal of large amount of money—estimated at Rs50-60 billion—from the banking system to pay the first instalment of annual income tax would create a crisis among banks and financial institutions that are already facing severe shortage of funds to disburse loans.

Banking institutions are experiencing severe crunch of loanable funds because of mismatch in deposit collection and credit disbursement. This asset-liability mismanagement has exerted pressure on credit to core-capital-cum-deposit (CCD) ratio of banks and financial institutions.

The central bank has fixed CCD ratio of 80 percent for banking institutions. This means banking institutions cannot lend more than 80 percent of their total local currency deposit and core capital combined. As of December 29, CCD ratio of more than half of the commercial banks had exceeded 77 percent. Many had speculated that CCD ratio of many of these banks would exceed the regulatory limit of 80 percent once the first instalment of income tax is transferred to state coffers at the end of the first half of this fiscal year on Sunday.

“There is tremendous pressure on CCD ratio. But, as per the data we have compiled so far, CCD ratio of none of the bank has exceeded the regulatory limit,” said Anil Sharma, executive director of the Nepal Bankers’ Association, the umbrella body of

commercial banks, adding, “We, however, haven’t received data of around 10 to 12 commercial banks.”

As many banks were close to exceeding the regulatory lending limit, it was feared that they would engage in malpractices seen in the last fiscal year.

A year ago, commercial banks were found using the interbank window to extend loans to finance companies. Finance companies then used to park the fund back in call deposit accounts of commercial banks, generally at the end of every quarter of the fiscal year. This enabled some of the commercial banks to keep the CCD ratio within the regulatory limit. But the window dressing later triggered a severe shortage of loanable funds, because banks were relying on “fake deposits” parked in call accounts-which could be withdrawn at any time-to enhance their lending capacity.

That problem has not occurred so far, as the daily volume of interbank lending among commercial banks, development banks and finance companies stood at Rs80 million to Rs610 million in the January 7-16 period, which, according to bankers, is normal. On Tuesday, Rs390 million in interbank loans exchanged hands among banks and financial institutions.

“We are relieved that things did not turn out to be as bad as many had predicted,” said Sanima Bank CEO Bhuvan Kumar Dahal. “But we are worried at the same time, as we do not have much loanable funds, which means credit disbursement would slowdown drastically in the third quarter of this fiscal year.”

Published: 17-01-2018 09:50

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