Banks raise lending rates as CD ratio tightens

KATHMANDU:

Citizens Bank International recently raised interest rate on auto loan by 0.5 percentage point. Sanima Bank, which until some time ago was extending home loan at eight to nine per cent interest, is now offering the credit at a rate of at least 10 per cent. Several other banks, like NIC Asia, have also joined the bandwagon and raised interest rates on consumer loans by 0.5 to one percentage point.

“Credit is becoming expensive because pile of money, which banks are allowed to extend as loans, is fast depleting,” NIC Asia Bank CEO Sashin Joshi said. “So to keep credit-deposit (CD) ratio within the regulatory limit, banks are trying to discourage lending for the time being.”

A total of 30 commercial banks reported average CD ratio of 77.35 per cent in the first half of the current fiscal to mid-January. Since then, the ratio, according to bankers, has tightened rapidly, and currently hovers around 79 per cent, which is very close to the regulatory limit.

Nepal Rastra Bank, the banking sector regulator, requires commercial banks to maintain CD ratio — technically referred to as credit to core-capital-cum-deposit (CCD) ratio — of 80 per cent.

This means of every Rs 100 in deposit and core capital, only Rs 80 can be extended as loans.

The remaining 20 per cent has to be parked at the central bank to maintain cash reserve ratio or mobilised to purchase secure instruments, like government securities.

Banks currently have adequate funds to purchase government securities. NRB, thus, estimates excess liquidity in the banking sector to hover around Rs 30 billion. But this money falls in the 20 per cent bracket and cannot be extended as loans.

There is short-supply of funds that can be turned into loans because firms, several days ago, withdrew deposits to pay second installment of income tax. This led to transfer of around Rs 18 billion from vaults of banks to state coffers.

“Also, Nepal Telecom, a state-run telecom company, took away deposits of around Rs 10 billion from banks to extend dividend to shareholders,” Joshi said. “And recently, fund of around Rs eight to nine billion collected on behalf of hydro companies and financial institutions that launched initial public offerings was also locked up, causing the CD ratio to tighten.”

The only way to address this problem, according to bankers, is to raise level of deposits. “And for this, state spending must go up,” Joshi said.

The government was able to spend only 45.95 per cent of the total annual budget of Rs 618.10 billion till the end of first nine months of the current fiscal in mid-April. But in the same period, government’s revenue went up by 31.54 per cent to Rs 162.35 billion, show the data of Financial Comptroller General Office.

Because of this mismatch in income and expenditure, the treasure surplus currently stands at around Rs 91 billion.

“Banks can heave a sigh of relief if the money parked in government coffers is released, as it would increase deposit level and help banks reduce lending rates,” Joshi said.

Source: THT