Text by B360 Correspondent
The country has been witnessing financial friction for over 2.5 years following the paid-up capital rise requirement for banks and financial institutions (BFIs). BFIs say that they are going through an unfavorable situation and facing difficulties to manage credit as per demand despite offering lucrative schemes on deposits. Demand of loan went up but deposit growth slowed down. The mismatch caused a financial friction as banks and financial institutions floated loans overlooking deposits.
According to Manoj Gyawali, President of the Development Bankers’ Association, along with rise of paid up capital the core capital of banks and financial institutions hovered at around Rs 450 billion which has increased the appetite of BFIs in terms of lending. As per the Central Bank’s rule, BFIs can lend only up to 80% of the deposit plus core capital. However, most BFIs breached the rule as their lending appetite increased. BFIs lend 80% of the deposit plus core capital and rest 20% must be utilised to maintain liquidity, cash reserve ratio (CRR) and invest in government treasury bills (T-bills).
However, BFIs have said that the chunk of capital at remaining 20% after permissible lending has grown significantly after paid up capital increment. However, the Credit to Core Capital cum Deposit (CCD) ratio has remained the same at 80%. BFIs are looking for flexibility in CCD from 80 to 85%, but the Central Bank has not bought the idea stating that the regulatory authority will stick to macro prudential norms for the overall stability of the financial sector.
The Nepal Rastra Bank— the central regulatory and monetary authority— has issued a flexible provision that BFIs are not forced to account for loan issued at subsidised interest also known as concessional financing in CCD. This provision has created the space for BFIs to issue another 30-35 billion rupees as loans.
BFIs do not have further space to lend, and cost of fund (interest on deposits and credit) is still high and there are no symptoms of correction in interest rates. Yet fixed deposit rates are 9-10% and loan rates stand at 13-14%.
Despite the unfavorable situation, profit-booking of BFIs is very sound. In the last fiscal 2017-18, commercial banks booked profits worth Rs 53 billion while profit of the banking industry recorded Rs 63 billion. In the first three quarters of the ongoing fiscal 2018-19, profits of commercial banks surged by 20% to reach Rs 45.67 billion compared to the corresponding period of the fiscal 2017-18.
The capital adequacy ratio of BFIs is 14% stronger than the regulatory provision of 11%. None of the BFIs has negative net-worth. Some of the financial institutions which were declared problematic in the past have completed the resolution process of the Central Bank and are now ready to operate under new board and new management, according to Nepal Rastra Bank (NRB). Nepal’s financial soundness and financial deepening has been commended by the International Monetary Fund (IMF).
The critical challenges faced by BFIs is lack of loanable fund since the past 2.5 years. The intensity of the challenge further deepened as the government’s expenditure (development expenses in particular) remained low. Resultantly, banks are facing a challenge to maintain CCD ratio at the end of the fiscal. This affects the banks capacity to expand the business and book-profit. The private sector also suffers equally from lack of credit and high interest rates thus making the cost of doing business high. Bhawani Rana, President of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has said that high credit rate and lack of credit availability are major challenges faced by the private sector, and the magnitude of suffering is equal to the days of insurgency and rolling black outs (load shedding).
To address the crisis of loanable funds, BFIs have floated some alternatives. They have asked that the government keep its funds as deposit in banks citing low development expenses. They have also asked the government to allow banks to keep government securities (Bonds, T-bills) as collateral towards loan from foreign banks. The Central Bank has allowed banks to access foreign loan but to lend in particular infrastructure and productive sectors only. However, banks are unable to avail this provision as they lack collateral. BFIs investment in government securities hovers at Rs 316 billion. “If the government allows us to keep government securities as collateral, Nepali banks will be able to approach foreign banks for loan with collateral,” stated Bhuvan Kumar Dahal, CEO of Sanima Bank.
As per regulatory provision, banks can borrow from foreign countries up to 25% of the core capital or tier 1 capital. The core capital of commercial banks stands at Rs 424 billion, so they can borrow up to Rs 106 billion to address the existing crisis of loanable fund.
Banks have also approached the Ministry of Finance to resolve the crisis of loanable fund. The MoF agreed to deposit half of the funds transferred to the local bodies to commercial banks. During the preparation of the fiscal budget 2019-20, banks had asked for waiver in interest tax while borrowing funds from foreign multilateral and bilateral institutions. As per the current provision, banks can borrow adding 3% points in LIBOR (London Interbank Offered Rate). To make the financing in the domestic market competitive from foreign borrowing, banks have requested the MoF for waiver on tax on the interest of foreign loans. Bankers say that the government has not addressed this in the fiscal budget.
To ease availability of loanable funds, BFIs have urged the government and NRB for facilitating development work as per the budget, streamlining remittance through formal channels, and allowing banks to keep government securities as collateral while borrowing from foreign countries or from multilateral agencies such as International Finance Corporation (IFC) of the World Bank Group.
The government has also introduced the provision of 10% Value Added Tax waiver (or cash-back to the bank account) while making payment through digital means like online payment, card payment among others. This provision, according to the banks, will help increase deposits as consumers have been granted 10% VAT waiver on digital payments. To make digital payments, a person must hold an account in a BFI. This will gradually formalize the economy as well as reduce the use of cash. This will also reduce the cost to BFIs in the management of cash and to Nepal Rastra Bank in the printing of bank notes.
The fiscal budget 2019-20 has introduced the provision of gold and silver deposits. Consumers can deposit gold and silver like cash, and the banks can count such deposits into the CCD ratio.
Forced Merger & Acquisition
Nepal Rastra Bank has hinted that it will adopt the policy of forceful merger of commercial banks. The merger and acquisition policy introduced by the Central Bank has encouraged many banks and financial institution to be merged involuntarily. In 2012, there were 32 commercial banks, 88 development banks and 70 finance companies in operation. In 2019, there are 28 commercial banks, 32 development banks and 24 finance companies. The size of the economy increased to Rs 3465 billion till fiscal 2018-19 compared to Rs 1527 billion in 2011-12. “The number of BFIs in operation are not more if we look at the expanding economy,” said Nara Bahadur Thapa, former Executive Director of the Nepal Rastra Bank, adding, “Further consolidation of the BFIs reflects the mentality of the policy makers who are not hopeful of the economy further expanding.
Consolidation of BFIs symbolises the stagnation of the economy which is against the vision of the government and planning.” The 15th five-year plan has estimated spending Rs 9.3 trillion in the next five years which requires more financial institutions and inclusive growth of the financial sector to manage it”.
According to Thapa, the numbers of development banks (class ‘B’ financial institutions) and finance companies (class ‘C’ financial institutions) will come down significantly. “All the financial institutions play different roles in the economy. Commercial banks (class ‘A’ financial institution) are for wholesale lending, they lend to the big corporates and industries; development banks finance startups and SMEs; and finance companies are for consumer financing. Commercial banks, which is for wholesale lending cannot operate small loans in a cost-effective manner, therefore the separate class of financial institutions is designed to address the financing need of every sector to accelerate economic growth. All these financial institutions complement each other,” Thapa reiterated, adding, “If we further consolidate development banks and finance companies, the specialties of financing will be distorted and the startups/SMEs and consumers will be deprived of financing which will create numerous gaps in the economy.”