With an uptick in demand for loans in the aftermath of Indian trade embargo and deceleration in the flow of money sent home by Nepalis working abroad, banks have started witnessing a mismatch in deposit collection and credit disbursement. Banks have collected fresh deposits of Rs154 billion since the beginning of this fiscal year in mid-July till January 13, show the latest data of the Nepal Bankers’ Association. In contrast, credit flow stood at Rs204 billion in the same period. This mismatch has lowered the stock of funds that banks can immediately extend as loans. Banks are currently allowed to convert 80 percent of deposits into loans. This means of every Rs100 collected in the form of deposit, up to Rs80 can be extended as credit. This, in technical terms, is referred to as credit to core capital-cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent. With deposit flow remaining comparatively lower, CCD ratio in some of the banks has exceeded 80-percent mark, according to the Nepal Rastra Bank. Rupak D Sharma of The Kathmandu Post met with Laxman Risal, CEO of NIC Asia Bank, to discuss this issue and more. Excerpts:

How did NIC Asia perform in the second quarter of this fiscal year?

We did very well. Deposit collection and credit disbursement jumped around 40 percent year-on-year; and net profit also surged by about 40 percent. These increments were in line with our projections.

Lately, many banks are facing shortage of loanable funds because of rise in credit to core capital-cum-deposit ratio. How severe is this problem?

This problem has hit most of the banks. We started seeing this problem from the second half of the last fiscal year, as credit demand started growing following the end of the trade blockade [imposed by India]. The hike in demand was pretty natural because credit appetite of borrowers had been suppressed by earthquakes of 2015 and trade blockade. So as soon as the effects of the twin disasters started subsiding, business activities started picking up, prompting borrowers to seek for more loans. Since then, credit demand has remained high. But it is unfortunate that government spending has not gone up despite introduction of the annual budget on time. We were expecting government spending to go up in this fiscal year because of post-earthquake reconstruction needs. So, slow government spending coupled with deceleration in remittance inflow has affected deposit growth rate, which, in turn, has limited banks’ ability to extend loans.

But Nepal Rastra Bank has said the problem surfaced after banks started extending loans in a haphazard manner, especially to unproductive sectors, such as real-estate. And huge growth in overdraft disbursement has given credence to the central bank’s statement. What is your take on this issue?

While talking about overdraft disbursement, we must always see whether the overdraft has been channelled to businesses or individuals. Hike in personal overdraft tends to create risk because the credit generally goes to unproductive sectors such as real-estate or stock market. But overdraft extended to businesses can’t be referred to as unproductive lending. If you look at our balance sheet, personal overdraft disbursement has not grown in a significant manner. I think the same applies to other banks. This means a big chunk of overdraft is going to businesses. Lately, credit demand from small and medium enterprises (SMEs) has surpassed that from large enterprises. We have always believed that deposit growth should come through savings deposit, while credit portfolio should expand on the back of expansion of loans to SMEs. We believe this will lead to sustainable growth of the institution. This, however, does not mean disbursement of real estate and auto loans has not gone up. It has. And this is the result of pent-up demand from the time the country was hit by devastating earthquake in April 2015. But this should not mean banks are diverting all available funds to unproductive areas. However, if concerned authorities think this could lead to creation of bubbles, then appropriate policies should be introduced.

Don’t you think depletion in stock of loanable funds is also the problem of asset-liability mismanagement? Shouldn’t banks take some responsibility for not being farsighted, as they focused too much on credit expansion despite knowing deposit levels were not growing in a desired manner due to deceleration in remittance inflow?

We frame our annual business plans based on available information, such as the government’s spending estimates. The government, for the first time in this fiscal year, had introduced budget one-and-a-half months prior to the commencement of new fiscal year. The budget was also endorsed by Parliament before the onset of the financial year. But look at the result. In the first half of this fiscal year, only 11 percent of funds allocated for capital spending have been spent. If the government had ramped up spending, as pledged earlier, we wouldn’t have faced shortage of deposits or loanable funds.

But this is not a new thing, isn’t it? The government has always failed to spend money on time. Didn’t banks take this downside risk into account while framing their annual business plans?

We were aware of this scenario as well. Yet we hadn’t predicted government spending to remain so low, especially in a year when budget was endorsed by Parliament before the onset of the new fiscal year. To address this problem, the only thing we can do is limit credit expansion. And most of the banks are doing that. However, we expect the situation to change soon, as government spending generally increases from mid-March. So, we believe this is a short-term problem. But again the big question is whether banks should be allowed to curtail credit expansion, especially at a time when the government has set an economic growth target of 6.5 percent. If borrowers are discouraged from acquiring credit now, they might take some time to regain their appetite. This might create a vicious circle and force the banking sector to brace for another round of surplus liquidity once government spending starts picking up from mid-March. So, policymakers and bankers should engage in serious discussion to find a way out.

But in the long run the problem of shortage of loanable funds will definitely recur if bankers fail to manage their assets and liabilities. This is because remittance income will not continue to grow in the coming days, as the number of outbound workers has already started declining, isn’t it?

The only way to offset the problem of deceleration in remittance inflow is by increasing government spending, especially in physical infrastructure. The country is facing huge infrastructure gap, especially in energy and transport sectors. So, spending should be made in those areas. And most importantly this expenditure should be made on time. Only this will raise velocity of money, create additional capital, give impetus to business activities and keep the economy robust. So, timely public spending is the key to raising deposit amount and expanding credit growth.

And what about the option of injecting fresh capital? Higher paid-up capital provides more room for banks to expand lending, isn’t it?

That won’t help much. To lower credit to core capital-cum-deposit ratio, which can only enhance lending capacity, deposits have to grow. So, we need to collect more deposits to cater to the needs of borrowers.

But mergers of financial institutions with close to 80 percent credit to core capital-cum-deposit ratio are also reducing their ability to disburse loans, isn’t it?

Well, banks that fail to expand business after injecting fresh capital cannot give higher returns to shareholders. And business expansion can be a time consuming process. So, mergers between entities that are doing good business tend to keep return on equity at a higher level. These types of mergers also make business sense, because commercial entities want maximum return on investments made. Mergers, apart from expanding capital base, also increase the base of borrowers and depositors, which automatically expands footprint of the institution. However, some of the promoters become emotional and resist mergers, because they do not want to shed stakes in companies that they’ve built. Well, NIC Asia was the first commercial bank to emerge from consolidation of two commercial banks. And we are doing good.

Lastly, how do you intend to meet minimum regulatory paid-up capital requirement of Rs8 billion within mid-July?

We are planning to issue 15 percent rights shares within a month, which will raise our paid-up capital to around Rs6.7 billion. We will then meet the remaining capital requirement by distributing stock dividend. We had submitted this plan to the NRB and we are on track to meeting our objective.