October 13: The credit flow of banks and financial institutions (BFIs) has started to increase due to the flexible policy adopted by Nepal Rastra Bank (NRB).

There has been an improvement in the lending of banks along with an increase in bank deposits due to the policy reforms of the central bank.

According to the data of Nepal Rastra Bank, the total deposits of banks and financial institutions in the current fiscal year has increased by Rs 78 billion, while credit flow also increased by Rs 73 billion.

By the end of the last fiscal year (FY), banks had collected a total of Rs 5767 billion in deposits and disbursed Rs 4879 billion in loans. As of October 9, bank deposits have reached Rs 5845 billion and credit flow has reached Rs 4952 billion.

Until last year, the government had given banks the facility to calculate 80 percent of the accumulated funds of the local level as deposits. Due to the removal of this facility from mid-July, only 50 percent of the deposit can be counted as bank deposits. As a result, bank deposits fell to Rs 5658 billion during the beginning of the current fiscal year. Bank deposit further declined to Rs 5610 billion by mid-August.

However, after discussions with bankers, Finance Minister Dr Prakash Sharan Mahat gave the facility to calculate 60 percent of the accumulated funds of the local level as a deposit from September. Coupled with the increase in inflow of remittance, deposits of Rs 116 billion were added to the banking system within one month.

After the increase in bank deposits, banks emphasized on lending. The central bank said that the loan disbursement of banks which was continuously declining till mid-August of the current year increased by Rs 93 billion in the last one and a half months.

Nepal Rastra Bank’s Deputy Spokesperson Dr Dilliram Pokharel says that bank loans increase due to the increase in business during the festive season.

“This is the impact of central bank’s policy on credit expansion,” said Pokharel.

Anil Sharma, chief executive officer of Nepal Bankers Association, said that credit expansion, which has been off the mark for a long time, has started increasing of late.

"The credit expansion of banks was negative for the past one and a half years," he said, "It has started to increase in the past few months."

Sharma said that although banks have not disbursed loans for big projects, small investments have been made in the import and consumer sectors.

"We don't have the detailed data on which sector the loan is going to," he said, "But, mainly, the loan may have been given to imports and consumer goods aimed at festivals."

In order to make the economy vibrant, the central bank had reviewed the loan policy for shares and personal real estate, real estate and vehicles last week. The NRB amended the Unified Directive, 2079 on October 5 and increased the margin lending cap to a maximum of Rs 150 million from 120 million.

Individual investors can now avail margin lending up to Rs 150 million, while institutional investors have a higher limit of Rs 200 million. This means that investors now have more flexibility in borrowing money for investing in the stock market.

This decision to remove the cap on margin lending comes in response to pressure from share market investors who argued that the cap of Rs 120 million on loans against the securities was negatively impacting the stock market.

Additionally, the amended guidelines require commercial banks to maintain a counter cyclical buffer of 0.5 percent by the end of the current fiscal year.

According to the data of NRB, the average credit-deposit ratio (CD ratio) of banks on October 9 was 81.86 percent. As banks can give loans by maintaining a CD ratio of up to 90 percent, they have the ability to extend loans of around Rs 475 billion at present. However, banks have been saying that there is no demand for loans due to high interest rates and weak economy.

The interbank interest rate fell to 1.91 percent on Monday due to high liquidity in banks and the lack of demand for loans.