Loan growth fuels liquidity fears

- POST REPORT, Kathmandu

Apr 4, 2015-

Country’s commercial banks have started facing liquidity squeeze as their lending grew twice as much as the deposits.

Credit expanded by 17.22 percent (Rs 155 billion) as of March 20 this fiscal, while deposit raised by just Rs 8.6 percent ( Rs 104 billion), according to the Nepal Bankers’ Association.

With the banks’ total deposit collection touching Rs 1.31 trillion as against lending of Rs 1.05trilion, the pure credit to deposit (C/D) ratio reached 80.41 percent. As the banks can also keep core capital under the head of deposit, the C/D ratio remains below 80 percent. The banks cannot expand the ratio above 80 percent of the deposit as per the central bank directive.

A liquidity squeeze occurs when the financial institutions have less short-term availability of money, causing banks to be more reluctant to lend out money within the interbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding will cause the overnight borrowing rate to spike significantly above its benchmark rate and, as a result, the cost of borrowing will increase.

Bankers said the banks have been facing a tight liquidity situation since the deposit totalling around Rs 40 billon was withdrawn from the banking system to pay tax one and a half months ago. The money has not yet returned to the system as the government is yet to loosen the purse strings. The government’s treasury still holds around Rs 90 billion.

According to the bankers, the tightening liquidity has pushed up the interest rate--both in deposit and credit. The Inter-banking lending rate and interest in treasury bills remain in the range of one percent, though.

NBA President Upendra Poudyal, however, believes the liquidity squeeze would ease as the government would start spending in the last quarter.

“The liquidity situation is likely to get even tighter in the third quarter as more people withdraw money to pay tax,” said Poudyal. “But thereafter, once the government raises its expenditure, banks will hopefully have adequate liquidity.”

The bankers said they have expanded credit massively this year as the spread rate led to a lower profit margin. The banks were awash with excess liquidity until the first half of this fiscal year, enabling them to extend credit at a lower interest rate.

“However, traders borrowed massively at a cheaper interest rate and deposited the amount in Indian banks,” said an informed source at a leading commercial bank. Until recently, the banks were offering short-term loans at around 7 percent interest, while the traders could get a return of 9-9.5 percent on deposits in the Indian banks.

The source, however, noted that the India banks too have started decreasing interest even as the rate in Nepal is picking up. “I think this will help curb reckless credit expansion,” the source added.

In a recent directive aimed at controlling capital flight in the name of project loans, the NRB asked the banks to categorise suspicious loans under watch list and make provisioning of up to five percent.

Published: 05-04-2015 09:09

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