A year down the line, many agree, what they predicted came out to be true.[break]
One particular sign of problem seen in the banking sector in 2011/12 was huge mismatch in deposit and credit growth.
In the year that ended on July 15, 32 commercial banks were able to collect Rs 173.92 billion in deposits, spurred by remittance amounting to over Rs 320 billion received from Nepalis working abroad. This amount made up 20 percent of the total deposits of 867.86 billion mobilized by commercial banks so far, unaudited financial reports published by banks show.
But much of this cash was not put into use as only Rs 87.78 billion was issued as loans in the year.
“Credit demand was low in the last fiscal year due to fragile business confidence induced by political uncertainty,” Ajay Shrestha, CEO of Bank of Kathmandu, told Republica.
The problem was made worse by labor-related problems and power shortage, which played a key role in holding manufacturing production growth rate at 1.7 percent last year. In the previous year the figure stood at 2.9 percent.
To turn the tables, Nepal Rastra Bank, the central bank, since last fiscal year, has started pushing banks to extend loans to the productive sector, like manufacturing and agriculture.
This initiative has been welcomed by bankers and they are more than willing to make productive use of huge pile of cash collected last year. But the question they pose is “how”, as “there is virtually no demand for credit”.
“Borrowers would only take loans if there is an opportunity to create assets, whether it be fixed assets as in long-term projects or current assets like stocks,” Shrestha said. “Since there is volatility and uncertainty in almost every sector - albeit stock market is gradually showing signs of improvement - no one is willing to take a plunge.”
One of the reasons behind low appetite for loans is slackness seen in the real estate sector. Last fiscal year, loans extended to this unproductive sector fell by 0.46 percent to Rs 69.53 billion. The drop was the upshot of Nepal Rastra Bank´s directive issued in September 2010, which compelled BFIs to gradually bring down lending to the sector to 25 percent of the total credit portfolio.
“Since then, much of the credit growth seen in balance sheets represents funds used to finance inflation,” Shrestha said, adding, “Core demand for credit has not picked up yet”.
This problem was compounded by growing deposits, on which banks have to continue extending returns, relatively higher lending rates, which further dampened the credit demand, and low return on treasury bills, which banks purchase to maintain statutory liquidity ratio of 15 percent.
So when the main business of banks is suffering so much how come net profit of commercial banks grew 12.56 percent to Rs 15.49 billion last fiscal year?
Many bankers say the figure does not reflect real growth. Take for instance, net interest income of commercial banks, which stood at Rs 32.81 billion in the year. This marked a growth of mere 2.35 percent, as against net profit growth of 12.56 percent. This was the same for operating profit before provisioning, which grew by only 1.27 percent.
“This shows much of the earnings made by banks did not come from their main business (of getting yields from difference in lending and deposit rates and other forms of income generated from fees, commissions and foreign exchange transaction, among others),” Anal Bhattarai, CEO of Commerz and Trust Bank, said.
One avenue from which banks like Agricultural Development, Rastriya Banijya and Nepal Bangladesh maximized earnings was amount collected from recovery of written off loans.
But many banks made quite huge chunk of income - Rs 6.05 billion, up 20 percent - by writing back amount allocated for loan loss provisioning.
“This year income made from the measure was in the higher end, but this kind of earning is not sustainable, as no banker wants to see provisioned amount piling up,” Shrestha said. “Focus, therefore, should be on giving a lift to core banking activities, which will happen only if investors stop feeling squeamish about the economy.”
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