New NRB rule to hit banks’ lending capacity in short-run

August 17, 2017 10:57 AM Sagar Ghimire


KATHMANDU, Aug 17: A new rule introduced by Nepal Rastra Bank (NRB) that no longer allows bank and financial institutions (BFIs) to count interbank deposits for their credit to core capital-cum-deposit (CCD) ratio has made the situation worse for some commercial banks that are already facing shortage of lendable funds.

Unveiling the Unified Directives 2074 on Wednesday, the NRB removed a provision that had so far allowed BFIs to include the deposit from another class financial institution for the purpose of CCD calculation.

According to bankers, this new rule will increase their CCD ratio, or the maximum limit of lending, in an immediate term that will hit their capacity to lend. This comes at a time when they are grappling with the dearth of lendable fund.

“Though the new rule is in line with international practice, the sudden decision through the unified directive has hit lending capacity for some commercial banks that were already close to the upper lending limit,” said Bhuval Dahal, an executive member of Nepal Bankers’ Association (NBA).

He said that such rule could impact as many as six commercial banks whose CCD ratios were close to the upper regulatory limit of 80 percent. According to the bankers’ estimate, the BFIs would not be allowed to include in their CCD ratios a deposit figure of around Rs 75 billion.

The NRB officials, however, say that the new rule will benefit the general depositors.  “Commercial banks used to offer high interest rates to development banks and finance companies to attract deposit so that they could be in a comfortable CCD position. However, with the enactment of the new rule, commercial banks will refuse to offer interest on such deposits as they cannot count it for their CCD ratio,” said Narayan Prasad Poudel, an executive director at the NRB.

“Though this might affect some banks’ lending capacity for a time being, this rule will compel them to pass higher interest rates to the general depositors,” Poudel added. 

Laxman Risal, the CEO of NIC Asia Bank, estimates that the new rule will immediately increase CCD ratio of commercial banks by 1 to 1.5 percentage points. 

“This will increase CCD ratio with some immediate effect, however, it may not have a significant long-term impact,” Risal said. 

The new rule of the central bank comes at a time when commercial banks were seeing growth in their deposit base, which would put them in a comfortable liquidity position to issue loans without worrying much about breaching the provision for CCD ratio.

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