The banks and financial institutions are facing a tough time due to a shortage of investment-grade liquidity, skyrocketing inflation rate, and problems in the external sector of the economy.
Even though the entire banking system is facing problems, industrialists and businesspersons are protesting against banks saying that interest rate hike and severe liquidity crisis has been a hindrance to business. Rosy Giri of Nepal Live Today caught up with Manoj Gyawali, deputy chief executive officer of Nabil Bank, to talk about the recent crises. Edited Excerpts:
Industrialists and businesspersons are protesting against banks saying that interest rate hike and severe liquidity crisis has been a hindrance to business. What is your take on this?
In some provinces, they have submitted memorandums too. The current situation can be described in two scenarios. One part is the liquidity situation. Earlier, many people said the banking system had a massive liquidity crisis. But there was a shortage of loanable funds only. Banks were able to pay their deposit or return the deposit at maturity or on demand.
The liquidity situation was adequate to make repayment of the bank but the loanable fund was short. So banks were not able to lend money as per the requirement of the borrower. That was the situation, and now, the situation has totally changed.
Last year, the central bank had prescribed a credit-deposit ratio (CD ratio) of 90 percent. Last year, almost all the time the CD ratio remained above 90 percent. This year the situation is gradually improving.
And if you see the current CD ratio situation, it’s 86.15 percent. That means we have more than 5,200 billion rupees of deposit and we can lend 90 percent of it. So, if we consider that at 86.15 percent, the banking system has room to lend about 200 billion rupees in the market.
So as of now, if banks would like to go up to their ceiling, banks can lend up to 200 billion rupees. This means, each bank can lend at least 10 to 15 billion rupees. I am saying that the liquidity crisis has eased. But the loan demand is minimal.
The interest rate is rising every day. That is the problem for entrepreneurs and businesses. This is a valid point. Because, if you go to any bank, they can’t offer a loan at an interest rate of less than 13-14 percent.
Another part of the market is that demand is substantially decreased. There is a decrease in turnover. So, when their turnover decreases, their profitability and profit margin decrease too. They are facing additional burden because of the increased interest rate.
And we need to understand the mechanism of interest rate raise as well. If you just say banks are increasing interest rates it would not be a wise statement.
Increasing the interest rate is not in the benefit of banks as well because if we raise the interest rate, businesses can’t sustain. Then ultimately they will convert it into non-performing loans. Ultimately, that will create a big problem for the banking industry and the bank itself.
Business community members are accusing banks of ‘extorting’ money from them in these difficult economic times by raising interest rates. Why have banks resorted to increasing interest rates after maintaining stability for a relatively long time?
Basically, we need to understand the basic economics of pricing. The interest rate is the price of the cost of deposit. Simple economics says when there is shortage of supply and there is high demand. In this situation, the price goes up. And if there is less demand and excess supply, the price automatically goes down.
So, what is the situation now? Last year, there was a pressure on resources, resulting in a deposit shortage. That’s why the deposit cost went up and up.
Increment in the interest rate discourages extra consumption, ultimately helping to incur inflation rate. Otherwise, the inflation rate would have been much higher than what it is today.
And next part the consumption is reduced. That means our input is reduced and ultimately that helps us to maintain our balance of payment (BoP)situation. There is less demand for loans in the market, and gradually the deposit is increasing.
So, with that raised interest rate, there are some positive outcomes as well.
Why is this acute shortage of liquidity continuing despite a sharp decline in demand for loans and hike in deposit rate?
The liquidity situation has been substantially improved if you compare last year’s situation and now. Last year, the liquidity situation was tight. All the banks were running above 90 percent of CD ratio.
Now, the average CD ratio of banks is 86.15 percent. So there is a gap of 3.85 percent. This means there is a room to flow loan of Rs 200 billion in the market.
We have witnessed shortage of liquidity funds at different times over the last few years. But what is the situation now compared to the shortages before?
It’s different. We faced a liquidity crisis earlier as well. But at that time the central bank had raised the capital of banks and financial institutions by four times. All the banks tried to make additional growth, given the increase in the capital. And at that time there was demand for resources too.
But the situation is different now. The deposit growth is not high. The BoP deficit was increasing. The government banned the import of certain products. The crude oil price rose by five times. It increased the inflation rate. And the Ukraine-Russia war also increased the price of products. The remittance also decreased despite the number of migrant workers increasing.
That said, the situation is coming to normalcy. I am hopeful that the new government comes with plans and programs to direct this economy to the next direction. I am also hopeful that the composition of the new government would be better and the cabinet would get a finance minister who understands the business and economy of this country.
In your view, how long will our financial system have to face the shortage of investable funds?
We have an investable fund. The cost of lending is high, which discourages business persons. I expect new policies will help the cost of borrowing to decline.
Many people say that this is also because of the policies of the central bank. What’s your take on this?
We need to take things positively. Think about this metaphor. When doctors prescribe some medicines, generally patients never like it. But that is done for the health of patients. The central bank has done it for the good health of the financial system.
What do you think needs to be done to ease the situation?
When a vehicle is running at five gear gear at the speed of more than 100 kilometers per hour, putting brakes will cause an accident. I mean to say that the central bank should ease the policies gradually, not at once.
Finally, how is Nabil Bank doing?
The bank is actually doing good in terms of profitability, balance sheet size, brand positioning. Last year, the bank was awarded the highest tax payer commercial bank.