May 23: The investable capital (liquidity) in the banking system is increasing due to the lack of credit flow compared to the increase in bank deposits. Although the liquidity crisis has eased, the credit expansion has not been possible due to the pressure on bank capital and the tightening of the market conditions.

According to the Nepal Bankers Association, the CD ratio of commercial banks has dropped to 84.88 percent as of this Baisakh (mid-April to mid-May). As per the directives of Nepal Rastra Bank (NRB), commercial banks can disburse loans by maintaining a CD ratio of 90 percent. Accordingly, banks can disburse Rs 250 billion in loans at present. However, banks have not been able to extend loans due to various reasons.

By mid-May of the current fiscal year, commercial banks have collected deposits of Rs 299 billion and disbursed only Rs 123.77 billion in loans. The association informed that the liquidity situation in banks has eased due to lack of credit flow compared to deposit collection.

Sunil KC, president of the association and chief executive officer of NMB Bank, says that although the liquidity situation is improving, the credit flow has not increased due to the pressure on bank capital and market conditions.

"Liquidity situation in banks is somewhat comfortable," he said in a press conference held by the association on Monday, "However, due to the pressure on capital and market conditions, banks have to invest cautiously."

The capital adequacy ratio of four out of 21 commercial banks in operation in Nepal has reached the limit set by the central bank.

Ashoke Rana, Chief Executive Officer of Himalayan Bank, said that since it became difficult to expand the business due to the tight capital adequacy ratio, issuance of rights shares or other policy concessions have been requested.

According to the data of Nepal Rastra Bank, the primary capital fund (Tier-One Capital) of 11 banks is less than 10 percent as of mid-January  this year. The lowest among them is 8.64 percent of Machhapuchche Bank, while that of Kumari Bank and Prabhu Bank is less than 9 percent.

Banks should keep the primary capital ratio below 8.5 percent. Banks have not been able to expand their business because the primary capital ratio decreases while providing loans. If the capital ratio is less than specified, the central bank will stop distributing dividends to such banks.

As banks get 9 percent interest rate on government bonds, there is less pressure on them to expand loans. Although the central bank has reduced the bank rate following the review of monetary policy, it has not reduced the interest rate of treasury bills.

However, as the interest rate has been decreasing along with the base rate of the banks lately, the association's president KC said that loans will be expanded in the coming days.

"The base rate and the interest rate, which had reached a high point, have started to decrease," he said, "If the banks’ capital eases in the next two months, the interest on loans will drop to 6-7 percent."

The central bank had set a target of 13 percent credit expansion in the current fiscal year. According to the association, the base rate, which reached 10.19 percent in January, fell to 10.48 percent in April. Similarly, the interest on loans, which reached 13.03 percent in January, also fell to 12.48 percent in April. President KC said that as per the instructions of the NRB, the interest rate difference between loans and deposits (spread rate) should be reduced to 4 percent from June. At present, the spread rate of banks is 4.2 percent.