> Decide to stop extending credit against collateral of stocks
> To prioritise productive sector

Following Nepal Rastra Bank’s concerns about aggressive lending, high interest rate on credit and concentration of loans in the unproductive sectors by banks and financial institutions, the 28 commercial banks of the country today decided to halt loans for automobiles, real estate and loans against collateral of stocks (margin lending) temporarily.

The central bank had summoned heads of the associations of class ‘A’, class ‘B’ and class ‘C’ financial institutions yesterday, and asked them to take corrective actions to control unfair practices prevailing in the banking industry to ensure ‘financial stability’.

A meeting of the Nepal Bankers’ Association — the umbrella association of 28 commercial banks in the country — agreed today to float loans only based on deposit growth and loan expansion will be prioritised to the productive sector as defined by the central bank, according to Anil Keshary Shah, president of NBA.

Bankers expect the ‘credit crunch’ situation to improve once the government’s capital spending gathers momentum. To properly implement fiscal budget 2016-17, the government needs to spend Rs 1.80 billion every day for the remainder of this fiscal ending in mid-July, which seems ‘unrealistic’.

Shah added that to a large extent the banks adopted aggressive lending policy on expectations that the government would also properly implement the budget to stimulate economic growth. Slow capital expenditure of the government has, however, put cold water on such hopes and they are now facing acute shortage of loanable funds.

Commercial banks witnessed loan growth of 30 per cent in the first half of this fiscal against the average annual growth of 19 per cent in the last five years.

“The demand for credit surged this fiscal due to the expansion of businesses that had more or less been stalled in the last two fiscal years due to the earthquake and border blockade,” explained Shah, adding, “The decision taken by banks to halt credit in certain sectors may hit economic activities and ultimately the government’s revenue.”

While the banks are clueless as to when the credit situation will improve, loan expansion for the remainder of this fiscal will be more modest, Shah added.

Bankers also agreed to keep the interest rate on deposit and credit at a rational level, maintaining the interest rate spread of five percentage points.

“The whole economy will suffer from high interest rate on credit, which is why we should be careful not to allow the deposit interest rate from skyrocketing. So, all the commercial banks have agreed to maintain reasonable interest rates on deposit and credit,” said Shah.

source:the himalayan times,10 feb 2017