Miscellaneous
Shortage of loanable funds lands businesses on a sticky wicket
Raj Kumar Basnet, the owner of Nepal Wood Industries Private Limited, applied for a loan as he was in need of Rs500 million to meet the working capital need for his business.Bibek Subedi
Raj Kumar Basnet, the owner of Nepal Wood Industries Private Limited, applied for a loan as he was in need of Rs500 million to meet the working capital need for his business.
After approaching several commercial banks, one of them was finally ready to lend him the required amount. He followed the due procedure and submitted all the documents demanded by the bank, including a collateral.
Basnet thought he had secured the amount. But it was not to be. The bank put his file on hold, saying that it does not have sufficient funds to disburse the credit amount promised earlier.
The shortage of funds is severely affecting Basnet’s business: he is struggling to purchase raw materials and maintain inventory. Despite his repeated requests, the bank would not inform him when he would receive the fund already sanctioned by the bank.
“My business needs a lot of liquid funds for smooth operation. But I don’t know when I will get the loan amount,” said Basnet.
Basnet is just a case in point, as many business owners have been denied the credit. Others are asked to wait until the banks are in a position to disburse loans. A few of them, who have managed to secure loans, are doing it at very high interest rates.
The businesses are suffering as the banks and financial institutions are facing an acute shortage of loanable funds. Such crunch is due largely to the mismatch in deposit collection and credit disbursement in the first quarter of the current fiscal year.
Twenty-eight commercial banks collected around Rs50 billion in deposits in almost three months that ended on October 12, 2018, while they disbursed Rs133 billion in loans in the same period.
The shortage of funds to meet the demand for loans in the industry is the result of the commercials banks’ aggressive lending despite the deposit growth failing to match the loan disbursement.
As the banks had to increase their paid up capital by fourfold to Rs8 billion by the end of last fiscal, the bank managements were under tremendous pressure to meet the high return expected by their shareholders.
“As the shareholders increased their investment fourfold, they expected their return to rise similarly and they applied pressure on the bank management to do that,” said Anil Shah, CEO of Nabil Bank.
“In order to meet the shareholders’ expectations for high profit, the banks started lending aggressively landing themselves into the current situation.”
According to Shah, the onus is on the bankers themselves to solve the current problem. “Curtailing lending is the only solution to the problem as we can’t sustain the current lending rate,” he said. “Deposits are growing at normal pace, but our loan disbursement is growing abnormally beyond our capacity.”
While sharing Shah’s views, some other bankers even demanded that Nepal Rastra Bank (NRB), the country’s central monetary authority, intervene to control the haphazard lending trend.
“It’s time that NRB stepped in and stopped the banks from such reckless lending,” said Bhuvan Dahal, CEO of Sanima Bank. “Curtailing lending towards productive sector will have negative effect on the overall economy, but it is high time that the central bank curbed the lending towards unproductive sector.”
Dahal pointed out another reason for the shortage of loanble funds—lending by the commercial banks in non-productive sectors like financing the purchase of automobiles and other luxury goods.
“If the lending is directed towards the productive sectors, the overall demand of credit will ease pressure off the banks,” he said.
Bankers have also urged the government to increase their capital expenditure in order to attract fresh funds into the banking channel. “If the government doesn’t have the capacity to increase the capital expenditure immediately, it should deposit the government fund in the commercial banks,” Shah suggested. “That will not only resolve the problem in the industry, but also give a leg up to the country’s economic activities as businesses will not be deprived of funds.”
The NRB officials, however, insisted that the current liquidity shortage is not as chronic as the bankers had portrayed. “We have noticed the mismatch between the deposit collection and loan disbursement. But this is a temporary phenomenon,” NRB Spokesperson Narayan Poudel said. “If necessary, we will step in by taking various measures to ease the situation.”