Improved the bank's lending capacity

Until about six months ago, more than half a dozen banks were under pressure from capital funds. Now they are also in a comfortable situation, according to the report of the National Bank of the financial year 080/81.

Capital Adequacy Ratio (Capital Fund) is the amount that banks themselves (banks) put in while disbursing loans. According to the current arrangement, commercial banks have to put in at least 11 percent from the bank and the remaining 89 percent from the depositors' deposits while disbursing a loan of 100 rupees. The 11 percent that the bank puts in is called the Capital Adequacy Ratio (CAR). It is also divided into two categories as primary capital and supplementary capital. In the

primary, only part of the paid-up capital and profit is added, while the capital collected from other sources including bonds is supplementary. Rashtra Bank has directed that commercial banks should maintain a minimum of 8.5 percent primary capital compared to risk assets. The lower the primary capital, the weaker the ability of banks to lend. Till last March, the primary capital of 5 banks was less than 9 percent. As of June, the core capital of the two banks is less than 9 percent. Bankers say that banks' credit flow capacity has improved as they are more than all the others.

With the ease of policy, the reduction of bad loan loss provision, increase in profit and loan recovery, the pressure on the capital fund of banks has decreased and the lending capacity has increased, said Santosh Koirala, Vice President of Nepal Bankers Association. Until last March, the primary capital of many banks was less than 9 percent on average. Until last June, the primary capital of all but two is above 9 percent, he said, while now the primary capital is 8.5 percent. This also seems to have improved the lending capacity of banks.'

In the past, the loss provision increased due to low profits and increased bad loans. This put pressure on banks' capital funds. Koirala says that now the pressure on the capital fund has eased and the situation has eased. "Until August, the condition of banks will improve, profits will also increase, losses will also decrease and primary capital will also be eased," he added.

In the past, although there was a large amount of loanable funds in the financial system, they could not lend due to the pressure on the capital fund. The data shows that the situation of the banks has improved. If the primary capital fund ratio of the banks is less than the specified in any quarter of a financial year, the National Bank also prohibits the distribution of dividends to the banks. According to this, some banks will not be allowed to distribute dividends this year as well.

Even though the National Bank has arranged that no additional funds should be kept in this capital fund ratio, the banks' ability to provide additional loans has increased, experts say. According to the law, additional funds should be kept in such additional fund called counter cyclical buffer. There is a provision to keep money in the additional fund based on the ratio calculated based on the growth rate of the economy and credit.

Compared to the previous year, the bad loans of the banks also decreased a bit last year. As of last June, banks' bad loans averaged 3.76 percent. Bad loans were 3.89 percent till March last financial year. During that period, the base rate of banks has also decreased. The base rate of banks averaged 8.01 percent last June. In March of the same financial year, such rate was 8.56 percent. Along with the decrease in the base rate, the interest rate of the banks' loans is also continuously decreasing. But since the loan demand did not increase as expected, the system has accumulated a lot of loanable funds. According to which, until last Thursday (August 13), banks and financial institutions have accumulated an amount that can be given as loans. At the end of last June, the banks had about 8 trillion in such amount.

Loan disbursements were expected to improve with the start of the new financial year due to accumulation of loanable funds in banks, interest rates falling to single digits. But banks say that loan demand has not increased as expected. As of last Thursday, the credit to deposit ratio (CD ratio) of banks and financial institutions is 78.95 percent. During the same period, the total deposit of banks and financial institutions is 64 trillion 61 billion rupees. According to the instructions of the National Bank, banks and financial institutions can give loans up to 90 percent of the total deposits.