Banks should take responsibility for creating problems in the realty sector
RUPAK D SHARMA
The country’s banking sector is currently facing an acid test with problems ranging from stagnancy seen in real estate market to credit slump, putting question mark on its ability to continue generating profit. Anil Gyawali, CEO of Nabil Bank, talked with Rupak D Sharma of Republica on the root causes of these problems. Excerpts:
There were rumors that Nabil Bank was planning acquisition of troubled Vibor Bank. Could you please confirm?
I am not aware of this issue and I don’t recall such topic being raised in board meetings as well. Yet I cannot rule out what you heard as a rumor, as other entities, like the central bank, may have floated the idea of rescue takeover to ensure financial stability. If that is the case, we will first assess the commercial viability of the project and if we find it feasible, we will forward the proposal to the board of directors and shareholders.
How has been the bank’s performance this fiscal year?
As always, Nabil Bank has managed to maintain a comfortable liquidity position. Since mid-July (when the current fiscal year began) till Jan 1, we were able to collect deposits of approximately Rs 6 billion and extend credit of approximately Rs 2 billion.
Does that mean the bank was not able to expand credit like in previous years?
Our credit growth rate has suffered this year as economic activities have not picked up. But even in this environment, our lending went up by around 5 percent over the first five months of the current fiscal year, which we consider a healthy growth.
Do you agree with claims made by people, including the finance minister, that banks are only sitting on top of cash without focusing on lending?
These claims are not true. If this had been the case, the CCD (credit to core capital cum deposit) ratio of commercial banks wouldn’t have stood at around 80 percent. But I agree banks are not in a mood to go on a credit expansion spree, as they have to take capital requirements into consideration. Currently, the average capital adequacy ratio (a measure of capital reserves against assets at risk) of private commercial banks stands at around 12 percent, as against the central bank’s requirement of 10 percent. Since the gap between the regulator’s requirement and capital buffer maintained by banks is not very big, banks cannot go on issuing loans unless they strengthen their shock absorbing capacity by raising fresh capital or retaining large chunk of earnings.
Has the docile real estate sector created roadblock in credit expansion process as well?
The uncertainty seen in the real estate market has definitely affected credit growth. It is said promoters with diversified business interests have invested significant amount in the real estate market as well. This exposure has tied their money in a seemingly unproductive area, which gives them no returns and at the same time prevents them from seeking fresh credit. Against this backdrop, any major problem in the real estate sector is very likely to destabilize the financial sector as well as the economy unless corrective measures are taken in time.
Who do you think should take responsibility for this?
Banks are also to be blamed for creating problems in the real estate market. Between 2008 and mid-2009, the real estate sector attracted excess investment than was needed because banks were too liberal in giving away loans. In this process, banks lost sight as they were under tremendous pressure to maximize profits and generate more dividends for shareholders. Some say the regulator should have intervened, but banks should also have taken prudent steps at that time.
Coming back to the issue of credit expansion, there are claims that credit slump is an upshot of expensive borrowing rates. What is your opinion?
Let me make one thing clear: investors should stop assuming that liquidity surplus in the banking sector would bring down lending rates to single digit in the near future. Long-term credit rates may go down by 0.5 or one percentage point but that’s the maximum discount banks can offer. This is because almost half of the deposits collected by banks are parked in fixed accounts on which interest rates still stand at around 11-12 percent. Contrary to this, we have to maintain minimum liquidity ratio of 20 percent (a central bank provision under which banks are required to keep money mainly in the form of cash, bank balance, money at call and short notice, and government securities) which virtually gives us no returns. Besides, yield on even 364-day treasury bills has fallen down to as low as 3 percent. To make up for the losses incurred in these processes we have to charge present level of interest rates on loans