Bankers call for lowering deprived sector lending

- POST REPORT, Kathmandu

Jul 4, 2014-

While the Nepal Rastra Bank (NRB) has been increasing the proportion of deprived sector lending banks and financial institutions (BFIs) have to make, bankers have demanded that the percentage be lowered, and ultimately be phased out.

In a recommendation to the central bank for the monetary policy 2014-15, Nepal Bankers’ Association (NBA) said it is necessary to bring down deprived sector lending as the sector does not have the capacity to absorb the credit.

“Moreover, there are already many micro-finance institutions (MFIs) working in the sector and the banks have also been forced to lend to the sectors such as agriculture, tourism, energy and small industries to the level as fixed by the central bank,” the NBA said.

Currently, commercial banks have to lend 4.5 percent of their total lending to the deprived sector while development banks have to lend 4 percent and finance companies have to lend 3.5 percent of their credit portfolio.

The central bank, which has been increasing lending requirement by 0.5 percent points every year for the last few years, is expected to increase it by another 0.5 percent points this year.  NRB officials said the central bank’s ultimate plan is to increase deprived sector lending for commercial banks to 5 percent.

NBA has also demanded the performance and advance payment guarantees given by the banks to energy projects be considered productive sector lending.

It also sought a revision in the current method of calculating the spread rate as the central bank has directed the banks and financial institutions (BFIs) to maintain spread rate below 5 percent by the end of the current fiscal year.

Currently, the spread rate is calculated as the difference between interest rate on deposits and credit. But, bankers have demanded operational costs also be added in the interest rate.

As banks are making negligible earnings from statutory liquidity ratio (SLR) due to excess liquidity in the system, maintaining 5 percent spread rate as per the current formula turns out to be 3 percent, according to NBA.

With BFIs getting lower interest on treasury bills under reverse repo, bankers have demanded the rate of repo and reverse repo be fixed at a certain level. They have also demanded interest on SLR as per the bank rate. Currently, the bank rate is 8 percent, but the banks get around 1 percent interest on treasury bills.

The association has also demanded the NRB allow the banks to take reimbursement from clients for the fee they pay to the Nepal Clearing House Limited for clearing the cheques, stating it has increased their costs.

NBA also urged the central bank to reduce the premium being charged on deposit insurance. It said the Deposit and Credit Guarantee Corporation which is being paid the premium does on bear any risk even if banks face crisis.

“As per the NRB’s regulation, small depositors are given first priority while paying back money if an institution go to bankruptcy through the auction of property, but corporation does not face any risk in such situation too,” read the statement.

Published: 05-07-2014 09:25

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