Money
New provision to exert pressure on interest rates
Interest rates on both deposit and credit, which were showing signs of moderating following jump in liquidity level, are likely to remain at the same level or go up further,Rupak D. Sharma
Interest rates on both deposit and credit, which were showing signs of moderating following jump in liquidity level, are likely to remain at the same level or go up further, as the banking sector regulator has introduced a provision that will lower the stock of funds that banks and financial institutions can immediately extend as loans.
The Nepal Rastra Bank (NRB), the central bank and the banking sector regulator, through the latest Unified Directives, has said banks and financial institutions from now onwards cannot factor in interbank deposit while calculating credit to core capital-cum deposit (CCD) ratio.
This means a bank or a financial institution that has accepted deposit from another financial institution cannot take this fund into account while calculating the CCD ratio.
The CCD ratio currently stands at 80 percent. This means banks and financial institutions cannot extend more than 80 percent of the local currency deposit and core capital as loans. In other words, lending limit for banks and financial institutions stands at 80 percent of local currency deposit and core capital combined.
The CCD ratio of commercial banks stood at around 77 percent in the end of July. With this ratio, commercial banks had around Rs69 billion that could be immediately extended as loans.
On the other hand, banks and financial institutions had interbank deposit of Rs72.1 billion as of mid-June, shows the NRB’s latest macroeconomic report. A big chunk of this deposit, according to bankers, is parked at commercial banks.
The portion of loanable fund at banks, interbank deposit in the banking sector and practice of depositing most of the interbank deposit in commercial banks indicate commercial banks will soon face shortage of funds that could be immediately extended as loans.
This will once again compel some of the banks to raise deposits at higher rates, which will automatically make credit expensive, Sanima Bank CEO Bhuvan Kumar Dahal said.
This scenario has surfaced at a time when some of the banks had started offering credit at below base rates. Base rates are rates based on which lending rates are fixed. Although the NRB has barred banks from offering loans at below their base rates, few are doing this now, because the stock of loanable fund has gone up since mid-June with the hike in public expenditure while fresh credit demand has remained subdued because of higher lending rates.
In spite of this drawback, bankers have welcomed the NRB’s latest move.
“The central bank’s latest decision is a welcome step, as most of the banking sector regulators around the globe do not allow banking institutions to factor in deposit of other financial institutions while calculating CCD ratio,” said Dahal, also the executive member of the Nepal Bankers’ Association, an umbrella body of commercial banks.
He, however, said the central bank should have given more time to banks and financial institutions to make adjustments.
His request for time extension comes at a time when the central bank has given relief to banks that had deliberately extended credit beyond the regulatory lending limit.
In March, the NRB had allowed banking institutions to calculate CCD ratio by deducting 50 percent of loans extended to the productive sector. The step was taken to replenish the stock of loanable funds, which had depleted to a level never seen in the recent history of the banking sector.
Although the temporary relief expired in mid-July, banks that could not bring their CCD ratio to 80 percent within that time have just been given a new deadline of mid-October to fix the problem.
The new deadline was issued after two banks failed to bring their CCD ratio within the regulatory limit within mid-July, Nara Bahadur Thapa, executive director of the Research Department of the NRB, recently told the Post in an interview. He, however, did not name the two banks.
This means these two banks will not be much affected by the latest NRB decision to prevent banks and financial institutions from factoring in institutional deposit while calculating CCD ratio. This is because they have until mid-October to bring the CCD ratio to 80 percent.
This is tantamount to rewarding banks that deliberately breached the regulatory lending limit and penalising those that were playing by the rules.
NRB Spokesperson Narayan Prasad Paudel did not want to comment on this.