Improvement in Banks’ Lending Capacity

Bank interest rates in Nepal

Banking Khabar/ The lending capacity of banks has gradually improved as the pressure on their capital adequacy ratio (CAR) has eased. The annual report of Nepal Rastra Bank for fiscal year 2080/81 highlights that banks are now in a more comfortable position regarding loan disbursement.

About six months ago, more than half a dozen banks were under pressure due to low capital adequacy ratios. However, the latest report indicates that these banks are now in a stable condition.

The capital adequacy ratio (CAR) represents the portion of capital that banks must allocate when providing loans. As per current regulations, when commercial banks lend 100 rupees, they must contribute at least 11% of their own capital, while the remaining 89% comes from depositors’ funds. This 11% is known as the CAR, which is divided into two categories: primary capital and supplementary capital.

Primary capital consists mainly of paid-up capital and a portion of retained earnings, while supplementary capital includes funds raised from sources such as bonds. According to Nepal Rastra Bank’s directive, commercial banks are required to maintain a minimum of 8.5% primary capital in relation to their risk-weighted assets.

The lower the primary capital, the weaker a bank’s capacity to lend. As of the end of the previous fiscal year, only two banks had a primary capital ratio of less than 9%, compared to five banks earlier in the year. The improved capital ratios have enhanced banks’ overall lending capacity.

The Nepal Bankers Association reports that with policy relaxations, a reduction in loan loss provisions, increased profitability, and improved loan recovery, the pressure on banks’ capital has eased, leading to an increase in their lending capacity.

In addition, the level of non-performing loans (NPLs) has slightly decreased compared to the previous year. As of the end of Asar, the average NPL ratio stood at 3.76%, down from 3.89% at the end of the fiscal year.

The report also notes a decrease in base rates. By the end of the fiscal year, the average base rate for banks was 8.01%, down from 8.56% earlier in the year. With the reduction in base rates, banks’ loan interest rates have also been decreasing.

Despite lower interest rates, loan demand has not increased as expected, resulting in a surplus of funds available for lending. As of Bhadra 13, banks and financial institutions have around NPR 725 billion in loanable funds, down from NPR 800 billion at the end of the previous fiscal year.

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