Since the beginning of the fiscal year, Nepal's financial sector is struggling with swelling deposits while credit demand has remained less than cheerful.
The excess liquidity at commercial banks has remained in the focus. However, development banks that house more than 13 per cent of total deposits and float about 19 per cent of total loans are also under pressure due to the liquidity situation.
Dikshya Singh of The Himalayan Times caught up with president of Development Bankers' Association of Nepal and CEO of Kailash Bikas Bank Krishna Raj Lamichhane to talk about liquidity management by class 'B' financial institutions, and their competition with other financial institutions, among others. Excerpts:
Currently the financial sector is haunted by liquidity surplus. What is the situation facing development banks? Are development banks also going through a difficult time to dispose their deposits?
Development banks are also going through a similar situation, with high deposit growth. Deposits at development banks have grown by almost 14 per cent since the beginning of the fiscal year, while lending has increased by nearly 11 per cent. We also have surplus funds, which can be disposed as loans. The only difference in the situation facing commercial and development banks is that we can park our excess funds in commercial banks, which yield about three per cent interest — higher than government treasury's rate at present. But we are not satisfied with the ongoing situation. As a bank, we all want to earn by floating more loans.
That means development banks are not too affected due to increased deposit. But how is the situation with credit?
Of late, we are witnessing higher demand for loans in hydro sector and tourism — especially in hotels outside Kathmandu Valley. However, it is wrong to expect that these sectors will mop up all the excess liquidity from the banks right away. It might take a few more months to finalise the loans and for the funds to flow. But it is a signal that the credit situation is going to get better soon.
Most commercial banks have already pulled their interest rates down. Will development banks follow suit?
Interest rates have definitely been affected in development banks as well. As we have to compete with commercial banks in terms of attracting deposits, we have to offer customers bit higher rates than those prevalent at the big banks. Likewise, we also have to compete with them in terms of loans, so our lending rate has to be a bit lower. Cost of fund at development banks is higher than other class of financial institutions, as we have to collect deposits at a higher rate and offer loans at a lower rate than others. This is the biggest challenge for most development banks.
Does that mean development banks are able to fulfill Nepal Rastra Bank (NRB)'s five per cent interest spread rule?
As I mentioned, development banks' interest spread is lower than that of commercial banks. The spread rate of most of us is lower than five per cent. Only those development banks that are operating in rural areas have higher spread. But their higher spread cannot be objectionable, as these institutions are providing financial services in far-flung regions. Moreover, central bank should not compare commercial and development banks with the same measuring scale because a large portion of the income of commercial banks comes from non-funded income sources such as by issuing Letter of Credits, among others but we don't have any other sources. So, NRB should fix a bit higher interest spread for development banks, as it does with cash reserve ratio and statutory liquidity requirement.
Is there any point in current classification of financial institutions since except for a few restrictions, all types of financial institutions are involved in similar types of operation?
All three types of financial institutions — commercial banks, development banks, finance companies — are more or less competing with each other for deposits and lending, so there is little point in categorizing the financial institutions. We have been requesting NRB to do away with such segregation but define the area of operations based on capital size so that small and big ones don't compete for the same customer. For example, a commercial bank with Rs two billion capital and a development bank with Rs 10 million capital should not be offering loans for a motorcycle. Maybe NRB will consider our request, as it is amending its Bank and Financial Institutions Act. Moreover, the central bank has allowed development banks to issue LCs for hydro projects and is positive about opening more trade financing for us, which is further blurring the segregation.
But aren't different types of development banks based on the area of operation and capital size — national level, 10 district level, three-district level and one district level — very much diverse?
There is a development bank with capital of Rs 1.38 billion and there is one with Rs 11.5 million. The issue and challenges of such large national level ones that can compete with commercial banks and the small ones confined to one district that have to compete with microfinance development banks are not the same. That's why we have been requesting the central bank to re-look the current classification standard.
Few years back, loan portfolio of class 'B' banks contained a large number of real estate loans which caused troubles at all types of financial institutions. How is the situation with such loans floated by development banks at present?
At present, financial institutions' real estate loans are low and most of the loans that are floated for construction and backed by good lands as collateral are not in trouble. Only a few loans taken by land developers for plotting of land are facing some repayment problems. The loans might be defaulted, but principal will not be lost as there are chances of recovery. Despite land prices remaining the same in the last few years, banks have not incurred huge losses so far. This means financial institutions have survived the real estate cool down till date. Four years back, real estate loans had brought in losses for the banks, but now the situation has become better.