Mar 1, 2017- Nepal Rastra Bank (NRB) has initiated action against half dozen commercial banks after they were found to have deliberately breached the regulatory lending limit.
Governor Chiranjibi Nepal informed about NRB’s move at the Parliamentary Finance Committee on Tuesday. The House panel had summoned Nepal to present the current status of the financial sector.
As per the NRB provision, banks can lend only up to 80 percent of their total funds (deposits and capital). An on-field inspection done recently by NRB officials found six commercial banks deliberately exceeding the regulatory threshold of the credit to core capital-cum-deposit (CCD) ratio.
Nepal, however, refused to mention names of the six banks when asked by the committee’s Chairman Prakash Jwala. “As people’s trust is fundamental requirement for the functioning of BFIs, it is inappropriate for the regulator to name institutions that are facing action,” said Nepal. “But I want to assure you the central bank has taken this issue very seriously and will take stringent action against the guilty banks.”
Nepal, however, did not explain what type of “stringent action” would be taken against the banks.
As no clear action or penalty is mentioned against BFIs for breaching CCD ratio in the unified directives issued by the central bank, the regulator itself is not clear about the action it should take.
Nevertheless, NRB, being the regulator as well as an autonomous government organisation, can take any action against BFIs to maintain financial stability. “As of now, we have dispatched letters to management bodies of the six commercial banks seeking written clarification,” NRB Spokesperson Narayan Prasad Paudel told the Post. “Most probably, we will give them warning for the first time.” As the central bank’s finding was based on raw data, another round of detailed investigation is also necessary to take any strong action, Paudel added.
However, if the central bank fails to take action immediately, it will work as a reward in disguise for banks engaged in unprofessional conduct. This is because they are reaping additional profits by lending a portion of 20 percent of total deposits and core capital that should either be kept in the form of cash or invested in secure liquid assets.
Hard cash parked in vaults does not generate any return, while yields on liquid assets, such as government bonds and treasury bills, stand at less than 5 percent. On the other hand, interest rate on credit is way more than that.
Meanwhile, Nepal said the situation of credit crunch is improving, with commercial banks currently having loanable funds worth Rs57.8 billion as per the last week’s statistics. “The situation is getting normal and we have made sure the productive sector will not face shortage of credit,” said Nepal.
Introducing the monetary policy last week, NRB restricted BFIs from extending more than 50 percent of the value of vehicle as credit to auto loan seekers—in a move aimed at reducing the flow of credit towards the unproductive sector. Similarly, it has reduced the threshold for personal loans to Rs7.5 million from Rs10 million. In the mean time, to replenish the stock of loanable funds, NRB has allowed BFIs to calculate the CCD ratio by deducting 50 percent of loans extended to the productive sector.
Source: The Kathmandu Post