Banks, flush with funds, see profits fall

The apparent paradox reflects the economic slowdown in the country

FI: While total deposits in all financial institutions has increased by 23 percent, its credit growth of about 11 percent has narrowed the banks’ profit margin, besides accumulating excess money.

As a result, net profit for the financial institutions dropped to Nu 0.74B in September last year, when compared to the net profit of Nu 0.85B in September 2013.

Bankers said besides seeing a narrow profit margin, banks have excess money of about Nu 19B lying idle and adding on to the banks’ liabilities.

Banks attribute this situation to less economic activity, which has slumped demand for credit, while deposits kept growing.

The total deposit base of the banking sector has increased significantly to around Nu 71B in September 2014 from Nu 57B in September 2013.  Credit has also increased to Nu 62B from Nu 56B during the same period.

Bankers said the slow credit growth was because of the restrictions that had been imposed and lifted only last September.

The overall credit to deposit (CD) ratio of the financial institutions has also declined from 97 percent in September 2013 to 87 percent last September.

The CD ratio determines the health of the banks in terms of their total deposits to that of lending.

Low CD ratio means banks are unable to use their money for lending purposes, and higher ratio would exert pressure on the banks’ capital, which could lead to asset-liability mismatch.

Meanwhile, the increase in deposit was attributed to increase in both demand and time deposits.

Demand deposits has increased from around Nu 32B to Nu 41B during the same period.  Demand deposits are those in which funds held in an account can be withdrawn at any time, such as current and savings account.

Funds held in current account have increased from about Nu 18B to Nu 24B within a year, while cash held in saving accounts also increased from Nu 14B to Nu 16B.  Hand time deposit (fixed and recurring) increased from Nu 25.7B to Nu 30B.

 

Tshering Dorji

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