Why CCD ratio for banks is rigid while CRR and SLR has gone down? Are we seeing the full picture? Hear the rationale of NRB’s decision

The Monetary policy of 2075/76 released by NRB has fixated the CCD ratio at 80%, whereas the CRR and SLR rates are brought down. The Cash Reserve Ratio (CRR) for last fiscal year was 6%, 5% and 4% respectively for commercial banks, development banks and finance companies respectively; which has been brought down to an even 4% for all three categories. Similarly, the Statutory Liquidity Ratio (SLR) for last fiscal year was 12%, 9% and 8% for commercial banks, development banks and finance companies respectively; which has been brought down to 10%, 8% and 7% respectively.

The CCD ratio of 80% indicates that out of every Rs 100 deposit, the banks can lend APPROXIMATELY Rs 80, the remaining Rs 20 can be used to fulfil the CRR and SLR requirements as mandated by the Nepal Rastra Bank (NRB). The common hue and cry we hear in the market is, “This policy has only increased the investable fund but the loanable fund is still down”. So with the CCD ratio at 80% the loanable fund still stands Rs 80 per Rs 100, however the relaxation of CRR and SLR has freed some amount which can’t be lent to the private sector. On this note Sharesansar caught up with Mr. Nara Bahadur Thapa, Research Head of NRB, to clear the clouds of confusion. So, regarding the topic Mr. Thapa’s reply was:

The special characteristic about this year’s Monetary Policy is that, we’ve kept our Macroeconomic anchors firm whereas the other ratios like CRR and SLR has been decreased. Here our macroeconomic anchor is the CCD ratio which stands firm at 80% like you said. So what we have to understand here is, the loanable fund stays the same, but the investable fund has increased which surely is a good thing for banks. The amount that was previously held up as CRR or SLR requirement can now be invested in Government Treasury Bills and Bonds, where they can earn interest.

This year’s Budget has allocated Rs 435 arba for Capital expenditure out of which Rs 314 arba will be mobilized by the Central government and Rs 121 arba will be mobilized by the Provincial governments. Apart from the revenues generated the government is also planning to raise fund from internal borrowing. The central government has planned to borrow Rs 172 arba and the 3 provinces out of 7 have planned to borrow Rs 2.80 arba. So this internal borrowing we’re talking about is the debt owed by government or the money borrowed by the government from its citizens and the private sector like banks and financial institutions. Thus the amount released by the decrement of CRR and SLR that can’t be loaned to private sector can be lent to the government by purchase of Government securities.

So if we remove the CCD ratio for the BFIs, they’ll rather choose to lend their funds to Real estate or auto loans as they will provide them higher interest rates than the Government securities. Even so the government might get fund, but that might result as a very expensive source as the current going rate for lending hovers around 12% to 13%. So if government borrows Rs 435 arba at 12% interest rates from commercial banks, then will the burden be limited to government only? Of course not the burden will be carried forward to the general citizens of the country.

In case if the government finds borrowing at market rate too expensive and there is no CCD ratio and withdraws all capital expenditure plan, will we be able to construct the Gautam Buddha airport? Will we be able to finish the highway constructions, the Bheri-babbai tunnel, the Rani jabara, the fast-track? No, none of them will see the light of day. Will the government be able to fulfil its promise to improve health, education, transportation, tourism and security? Will the government be able to stand upto the sustainable goals of decreasing poverty and increasing the living standard? When the planned capital expenditure aren’t incurred and the GDP doesn’t increase, will we be able to meet the economic growth target of 8%?

So it is important that we, as the central bank of the country, look through all perspective and allocate the scare financial resource effectively to make the most out of it. We have to strike a balance between the credits disbursed in each sector from real estate to agriculture to capital market (as margin loans) to auto loans to loans for deprived sector to tourism loans to Government lending. If we solely look from the perspective of earning profit without looking at the bigger picture, the economy will surely collapse.

Similarly once these capital expenditures have been incurred and these projects take shape, the benefit will be yielded not just by the government and general public. The Banks and Financial Institutions (BFIs) will also have ample opportunity to explore new possibilities. With the completion of roads, they can expand their business to all parts of the country with more convenience then they are now. The other benefit that banks get from this is, it helps them in creating liquidity-credit balance. Unlike the other credits, the Government securities are easily marketable and liquid in nature. So whenever they are facing liquidity shortage, they can just sell their holdings and get cash.

Thus, the market hue and cry might have been because of our habit to look at the surface only, but we here at NRB are at a position of responsibility and without thorough analysis we don’t bring directives out of thin air.