Class (B) and (C) FI lending drops

KATHMANDU, OCT 17: 

Finance companies and development banks are straining to expand their credit portfolio due to the inability to lower interest rates.

“Last year, we had a terrible time due to contraction in deposits, but this time we are facing difficulty in finding projects to finance,” said president of Nepal Financial Institution Association Rajendra Man Shakya. “Since finance companies are charging higher interest rates in comparison to commercial banks, demand for credit has shifted to commercial banks,” said Shakya who is also CEO of CMB Finance.

In the first month of this fiscal year, lending by finance companies contracted by 0.1 per cent to Rs 95 billion, while development banks attained 1.4 per cent growth on total lending. Meanwhile, commercial banks have increased their loans by three per cent to Rs 788 billion. 

“We are charging more than 14 per cent on loans since we have to maintain about eight per cent interest rate for deposits. This has made us lose out on prospective borrowers who opt for relatively cheaper loans,” said a banker involved with a national level development bank.

Due to comfortable liquidity situation in financial institutions (FIs) since last one year, banks have started lowering deposit and lending rates. Large and established commercial banks have lowered lending rate to as low as 15 per cent — even for personal consumable loans. 

However, class ‘B’ and ‘C’ financial institutions are not in a position to start lowering interest rates mainly to retain deposits and the higher cost of operation does not allow them to start lending at low rates. 

Moreover, in the last fiscal year, inter-bank lending rate among non-commercial banks stood at 8.16 per cent on average, while commercial banks enjoyed a low inter-bank rate at 1.28 per cent on average.

In the last few years, three development banks and six finance companies had to go through Prompt Corrective Action of Nepal Rastra Bank for being on the verge of collapse due to bad corporate governance and liquidity crunch. One development bank and one finance company are going through liquidation at present. These instances have dented the credibility of these institutions among the public.

“Last year, finance companies witnessed large amount of deposits exiting but this year we are all comfortable with deposits,” points out Shakya, adding that corporate deposits have gone down significantly, but deposits from the public has returned to the finance companies. 

Due to increased mergers, number of finance companies has come down to 70 from 79 this fiscal —showing lowered deposit and credit amount in the papers for the group.

Source: THT