As CD ratio nears threshold, banks may have to curb lending

KATHMANDU, MAR 10 -

Commercial banks will find it hard to lend in the coming days unless their deposit collection improves. As of last week, the credit-to-deposit (CD) ratio of the banks’ reached 78 percent.

Commercial banks have to maintain their CD ratio below 80 percent as per the central bank directive. This means the banks have just 2 percent margin to lend. “In this situation, banks will no longer be able to lend further until they increase their deposits,” said a senior official of the Nepal Rastra Bank (NRB).

Since the beginning of this fiscal year, commercial banks’ deposit growth has been sluggish, while their lending increased several folds. The deposits grew by just Rs 33 billion until February, while credit grew by Rs 83 billion, according to the NRB.

“The deposit growth in the last two weeks remained almost zero, while the credit grew by around Rs 25 billion,” said Civil Bank CEO Kishor Maharjan. “This increased the CD ratio close to 80 percent.”

With the liquidity situation tightening, commercial banks have started increasing interest rates on fixed deposits. Some banks are even offering as high as 9 percent interest on fixed deposits, bankers say. Earlier, there had been gentlemen’s agreement among the banks not to increasing the interest rate above seven percent, according to a bank’s CEO.

“There is no alternative to halt lending for banks with higher CD ratio if they fail to increase their deposits,” said Himalayan bank CEO Ashoke Rana. “The situation arose due to some banks’ failure to properly manage loans.” He said a few banks lent aggressively in the first half of this year. On top of that, the banks were also forced by the regulator to increase their lending to the deprived and other sectors such as agriculture and hydropower. “There is no provision of penalty for banks that make aggressive lending without the deposit growth assurance,” he said.

The NRB controls the CD ratio with the provision that the banks have to maintain at least 20 percent net liquid assets to avoid capital charge.

According to an NRB official, the central bank has sought plans for loan recovery from two banks whose CD ratio has crossed 80 percent and two other banks that have failed to maintain net liquid assets at 20 percent.

The country’s banking system had faced acute liquidity crunch in fiscal 2010-11 due slow deposit growth and high lending rate. And the situation now is similar. Inter-bank lending rate of 7 percent suggests how tight the liquidity situation is at present.

However, central bank has not shown urgency to issue repo. “There is still excess liquidity of Rs 15-20 billion in the system. So there is no point of issuing repo as long as the market itself serves the purpose,” said NRB Spokesperson Bhaskarmani Gnawali.

However, bankers say a majority of the banks are facing tighter liquidity situation and only a handful of banks, such as Rastriya Banijya Bank and Nepal Bank, have excess liquidity. “With a single bank having excess liquidity does not mean that the whole system is flush with liquidity,” said Maharjan.

Source: The Kathmandu Post