Arjun Pakhrin of Chanauli, Chitwan after returning from foreign employment was planning to start a small sized poultry farm in his home town. In January, with savings from having worked overseas, Pakharin started building a poultry house on his land to accommodate 1000 chickens. He then initiated a loan application with the state-owned Agricultural Development Bank seeking Rs one million for the business. Initially, the loan officer was positive but after weeks of waiting to process his file, he learnt that it was kept on hold saying that the bank doesn’t have sufficient funds to sanction the loan.
“I have already finished my savings and I am not sure when I will receive the bank loan. I don’t know what is going to happen to my venture,” said Pakhrin who is clueless about the ongoing credit crunch that has affected a majority of banks.
Pakhrin is just one example of the many people who are being currently denied loans by banks citing lack of funds. Others who have managed to receive loans are doing so at high interest rates.
Banks have collected fresh deposits of Rs 194 billion from the beginning of this fiscal year in mid-July till the end of March, as per the latest data of the Nepal Bankers’ Association (NBA). In contrast, credit flow amounted to Rs 248 billion in the same duration of time. This mismatch in deposit collection and credit disbursement is the major reason for the shortage of loanable funds in the banking industry.
The shortage of funds to meet the demand for loans in the banking industry is the result of an upsurge in credit demand in the aftermath of the Indian trade embargo. However, the rise in demand for loans has not been matched by deposit growth because of deceleration in remittance flow. Also, the domestic source of funds for banks has dried up with slow capital expenditure by the government.
This has led to fierce competition among banks to attract deposits by offering higher interest rates even up to 12 percent on fixed deposits. Deposits made under saving accounts which offer lower interest rates have started to migrate to fixed deposit accounts. This increases the cost of funds for the banks significantly and also has not made a significant deposit increase as desired by the banks.
With sudden depletion in deposits, majority of banks have started to breach regulatory lending limits. Legally, banks can lend only up to 80 percent of their total funds (deposits and capital), but a majority of them were found to exceed the regulatory threshold of the credit to core capital-cum-deposit (CCD) ratio.
Bankers lobbied with Nepal Rastra Bank (NRB) to increase the CCD ratio to 85 percent. Although, the regulator did not agree, in February it came up with a new directive allowing banks and financial institutions to calculate CCD ratio by deducting 50 percent of loans extended to the productive sector. This measure was supposed to increase the loanable fund by more than Rs 100 billion. However, reality otherwise as loan seekers like Pakhrin are still struggling for funds.
The private sector has urged the central bank to immediately introduce measures to deal with the problem of credit crunch and rampant hike in lending rates. Recently, a delegation of Confederation of Nepalese Industries met with NRB officials and complained that shortage of loans and high lending rates would eventually erode competitiveness of industries, leading to contraction of industrial activities.
The Central Bank, however, is of view that the present credit crunch is the result of aggressive lending of commercial banks to unproductive sectors. “The banks rampantly lent in unproductive areas like real estate and automobile financing until they ran short of loanable funds,” said Narayan Prasad Poudel, NRB Spokesperson and Chief of Banks and Financial Institution Regulation Department. “Bankers should have known that increasing loans without matching growth in deposits would result in the prevalent situation. But they ignored the basic principle of banking which has landed them in this crisis.”
According to NRB, the onus is on bankers to solve the current problem. “They have to increase deposits by offering higher interest rates while slashing lending to unproductive sectors to come to a comfortable position,” said Poudel. “We have noticed such changes as banks have started increasing interest rates on deposits.”
Nevertheless, it will take some time for banks to recover from the crisis, Poudel added. Bankers also said this situation of credit crunch won’t last for long. “The fiscal year is about to end and government spending will increase significantly during this period,” said Bhuvan Dahal, CEO of Sanima Bank. “We can expect more than Rs 100 billion of fresh funds into the banking channel which will ease the pressure in the industry.”
With local elections at hand, the government spending is further expected to increase ultimately increasing the size of the funds available to the banking industry. The lending rate, however, according to Dahal is less likely to come down. “In a country like ours where demand for credit is always high, lending rate is not going to come down any time soon,” he said.