Govt’s tightening policy puts Nepali banks in jeopardy

Banks are flush with loanable funds, but they are not seeing demand for loans. As a result, the Nepal Rastra Bank (NRB) has been mopping up excess liquidity from the banking system through different monetary instruments.

According to the central bank, banks and financial institutions (BFIs) have a lending capacity of over Rs 850 billion at present. However, BFIs are not able to invest. On the other hand, an unruly group has gone after the banking and financial sector unchallenged. The government seems helpless against such groups. Recent arrests of bankers on suspicion of irregularities have unleashed a situation of fear and terror in the banking and financial sector.

That is why, bankers say, despite excess cash, there has been no investment. No wonder bankers are saying there is no environment for investment in the country. Stakeholders say that unless the government takes action against the groups spreading anarchy by saying 'loans need not be repaid' and 'if you protest, loans will be waived', the situation in the banking sector will not improve.

Banks hesitant to invest

 Bankers say the servicing of loans by borrowers has been affected after unruly groups started a campaign against banks. The banking and financial sector has been facing this problem for about a year now. On the other hand, the overall economy has shrunk recently. Most businesses are in a slump as there is no demand in the market. There has been no demand for loans from banks. In such a situation, bankers say that with unruly activities getting support to destabilize the banking sector, they have to hesitate even to lend.

However, the government has not taken any action against those spreading anarchy against banks. Protests are also being organized in the name of victims of microfinance. Some bankers feel that the state has been supporting those agitating against microfinance instead of controlling them.

The Nepal Rastra Bank has set a maximum credit-to-deposit ratio (CCD ratio) of 90% for banks. The current CCD ratio of banks is only 80.02%. While deposits have been increasing daily, lending has not increased proportionately, resulting in an accumulation of cash in the system.

According to the Nepal Bankers' Association, there has been no demand creation in the market. Interest rates have declined, but there are no new borrowers. Commercial banks, development banks, and finance companies have collected deposits of Rs. 6.17 trillion and disbursed loans of Rs 5.09 trillion.

Sunil KC, president of the Nepal Bankers' Association, cites protests against banks, arrests, and unnecessary detentions of bankers as reasons for the inability to disburse loans. “Additionally, imports have declined compared to the previous year, and most industries have not been operating at full capacity. Public construction projects have also been sluggish due to a lack of funds. For these reasons, there has been no demand for loans," KC said. "As soon as money stops flowing into the construction sector, many other sectors will be affected. These are the reasons why overall loan demand has declined." Banks' non-performing loans have also increased compared to previous levels, said KC, who is also the CEO of NMB Bank.

Tightening policies

Bankers say the central bank is not relaxing certain policies because of the conditions set by the International Monetary Fund (IMF). The IMF granted Nepal concessional loans worth $395.9 million under its Extended Credit Facility (ECF). Officials, who were alarmed at depleting foreign exchange reserves and increasing current account deficit due to high imports, agreed to accept the IMF’s conditional loan which extends until February 2025. Bringing reforms to the financial system and public finance management, including amending the law to make Nepal Rastra Bank autonomous, preparing a blueprint to prevent misuse of loans, conducting external audits of 10 big commercial banks are some of the conditions set by the IMF.

The government implemented some reform measures, but it dragged its feet on the implementation of some other conditions set by the IMF. The then finance minister, however, expressed commitment to implement all reforms in October last year after the IMF withheld the third installment of its loan.

NRB’s directives on loan classification, the new provision of a six-month wait for non-performing loans to be upgraded, and the guidelines on working capital loans were met with opposition from the private sector. Private sector bodies like FNCCI and CNI have urged the government to clear IMF loans at the earliest.

NRB's requirement of raising capital reserve by 0.5 percentage points to 9% by mid-June will decrease bank's capacity to lend by around Rs 25 billion, according to bankers. Likewise, further shrinking of spread rate to 4% has hit profitability of banks.