KATHMANDU, June 19: Bankers have demanded the removal of credit to core capital and deposit (CCD) ratio, stating that the prudential lending limit set by the Nepal Rastra Bank (NRB) is the main culprit behind the ‘credit crunch’.
Bank and financial institutions (BFIs) are required to maintain 80 percent of CCD ratio. This means that they cannot lend more than 80 percent of what they have as core capital and deposit combined.
As many banking institutions have reached close to 80 percent of the CCD ratio, they have been facing of shortage of loanable fund in recent months. To get rid of the shortage of lendable fund, Nepal Bankers Association (NBA) has urged the NRB to scrap the rule on CCD ratio.
To bring the CCD ratio to a comfortable position, banks have been competing with each other to raise deposit rates to attract fresh deposits. The fixed deposit rate has already reached 12.5 percent for some banks, while the credit rate is also climbing upward in recent months. With the 5 percent spread rate, the credit rate could go up to 17.5 percent for those banks.
“There are already cash reserve ratio and statutory liquidity ratio in place which requires banks to maintain certain level of liquidity. CCD ratio has only curtailed their lending capacity,” Gyanendra Dhungana, NBA president, told Republica. “We have requested the NRB to scrap the CCD ratio requirement through its monetary policy for the upcoming fiscal year to address the shortage of lendable fund.”
The NBA demand to remove the CCD ratio requirement comes in the wake of the NRB preparation to release the monetary policy for the upcoming Fiscal Year 2018/19.
According to Dhungana, 28 commercial banks will have nearly Rs 120 billion of additional fund immediately available to extend as loans if the CCD ratio rule is scrapped.
“The current problem is not with liquidity. We have fund, but we cannot lend because our hands are tied with the CCD ratio rule,” he added.
The bankers had made similar demand last year also. However, the central bank seems to be adamant about the prudential lending limit. The NRB officials say that certain level of liquid funds must be maintained by a banking institution in case it needed to pay its liability immediately. They also say that any relaxation on the CCD ratio would only fuel rapid credit expansion of the BFIs.
However, bankers argue that the CCD ratio is the norm that is rarely used in other countries and there are other rules that govern the liquidity that banks must maintain.
“If the central bank cannot scrap the CCD ratio rule immediately, it should do something to address the shortage of lendable fund. One way could be the flexibility to deduct certain percent of priority sector lending from the CCD ratio as it had done last year,” said Dhungana.