March 2: After the tight monetary policy adopted by Nepal Rastra Bank (NRB) reduced credit expansion, the credit-deposit ratio (CD ratio) of commercial banks finally started to decline. After the ease in CD ratio of the banks, which have been facing liquidity problem since the last fiscal year, their additional credit expansion capacity has reached more than Rs 175 billion.

According to NRB, the total deposits of banks and financial institutes (BFIs) have reached Rs 5377 billion as of Monday.

Out of this amount, commercial banks have deposits of Rs 4740 billion. With the average CD ratio of only 86.22 percent, they have the ability to extend loans of more than Rs 175 billion. As instructed by NRB, banks should maintain CD ratio within 90 percent.

According to the data published up to the period of mid-January of the current FY by NRB, the CD ratio of most of the commercial banks looks good. Among the 22 commercial banks in operation during this period, only Kumari Bank's CD ratio is higher than the limit set by NRB. Similarly, the CD ratio of Global IME Bank and Nabil Bank is close to 90 percent.

Standard Chartered Bank has the lowest CD ratio at 78.73 percent. Apart from this, NRB informed that the CD ratio of Rastriya Banijya Bank, Nepal Bank, Sanima Bank and SBI Bank is less than 85 percent.

Sunil KC, president of Nepal Bankers Association and CEO of NMB Bank, the CD ratio of banks has eased because the banks have not disbursed loans despite to good deposits mainly  because of remittance inflow.

 “Currently the CD ratio has eased as there is no demand for new loans in banks. Only small investments are being made to the customers and deposit growth rate is good as well. In recent times, loans have become expensive along with the lack of liquidity, deterring industrialists from taking new loans from banks. The industrialists are in a wait-and-watch state as there is also a movement against the banks’ interest rates,” said KC, adding, “Similarly, due to the impact of Covid-19 and the Russia-Ukraine tension, inflation has risen and economic activity has decreased, so the demand for loans in the market is low. However, since the rate of inflation has been decreasing recently and the economic indicators are easing, the bankers expect credit to expand gradually.”

 KC says that the interest rates on bank deposits have started to decrease and borrowers will get relief by the next quarter. He said that the interest rate will also decrease due to the concession given by NRB by reducing the spread rate and bank rate.

After much criticism over the high interest rates of banks, NRB announced to reduce the spread rate of the banks through the first quarter review of the monetary policy of the current fiscal year. It issued instructions mid-December and asked banks to reduce the spread rate in two stages. According to the instructions, commercial banks will have to reduce the spread rate to 4.2 percent from mid-March 2023 and development banks and finance companies will have to reduce it to 4.8 percent. From mid-June 2023, commercial banks have to apply 4 percent spread rate and development banks and finance companies have to apply 4.6 percent. By reducing the spread rate till mid-April, the interest rate on loan will decline from mid-April.

Likewise, NRB reduced the overnight repo interest rate by 1.5 percentage points to 7.5 percent from the half-yearly review of monetary policy. It is also expected that the cost of capital of banks will decrease and the interest rate will decrease to some extent.

Anil Sharma, CEO of Bankers' Association said, “Now there is no room for banks' interest rates to go up. The policy concession given by NRB will also reduce the interest rate, but they will have to wait until the next quarter.”