Tough challenge ahead for newer banks

WITH the Nepal Rastra Bank (NRB) directing commercial banks to maintain institutional deposits at less than 60 percent of their total deposits, newer banks will be in a difficult position to implement the NRB directive. In its new monetary policy, the NRB has asked commercial banks to lessen their dependence on institutional depositors. The central bank adopted such a policy as a precautionary measure against a possible liquidity crisis when a few big institutional depositors withdraw deposits. However, with relatively lower number of branches and individual depositors’ base, newer commercial banks are heavily dependent on institutional deposits. Commerz and Trust Bank CEO Anal Raj Bhattarai said the central bank’s policy, although good for the financial sector, poses a big challenge to new banks to increase the number of their individual depositors. “It is easier to get corporate deposits than individual deposits. To increase the number of individual depositors, newer banks have to go for advertising and add branches, which will add costs,” he said. “But how hard will it be to implement the NRB’s policy will be determined after the central bank issues the directive.” Established two and half years ago, Commerz and Trust Bank currently maintains institutional deposits at more than 60 percent of its total deposits. Bhattarai has expected that the central bank would provide enough time for newer banks to comply with the directive. Century Bank, which is also among the newer banks, also has over 60 percent institutional deposits. Century CEO Ganesh Kumar Shrestha said although difficult, they would meet the set criteria within the deadline. “We will encourage individual deposits and discourage institutional deposits,” said Shrestha. “I have already directed managers of all 31 branches to attract more individual deposits and propose new deposit products every two months to attract as many as individual depositors.” Despite the challenges to increase individual deposits, bankers agree the central bank’s move will reduce liquidity-related risks. Mega Bank CEO Anil Shah termed the NRB policy “positive and necessary”. “As far as Mega is concerned, we focused from the very beginning on saving deposits from individuals and we are in a comfortable position when it comes to reducing the size of institutional deposits,” he said. The Nepal Bankers’ Association has asked the central bank to define the term “institutional deposits” — whether it covers relatively bigger institutional depositors or every of them regardless of the deposit size. NRB spokesperson Bhaskar Mani Gnawali said central bank will have to exercise on the deadline to be given to banks and even to define the term “institutional deposits”, if necessary. “As a majority of banks have less than 60 percent institutional deposits, they will not find it hard to comply with the central bank directive,” he said, adding the average share of institutional deposits in the total deposit base of banks is around 50 percent. The NRB, which had previously focused more capital, is now shifting its focus on vulnerability of the system as a result of liquidity-related problem. The monetary policy has also announced taking prompt corrective action against BFIs that fail to maintain adequate liquidity.