Money

Banks introduce attractive schemes

- Post Report, Kathmandu

Mar 23, 2018-

On Tuesday, NIC Asia Bank introduced a scheme for savings accountholders, which entitled depositors to accident insurance coverage of Rs500,000, free mobile phone top-up cards of Rs100 and feeless withdrawal of money from automated teller machines of any financial institution.

Upping the ante, Nabil Bank, one of the oldest private sector banks, has introduced a fixed deposit offer, under which customers would be given returns on money they park at the institution on the day they subscribe to the scheme. These are two examples of the intensity with which commercial banks are competing to attract deposits. Banks are likely to float even more attractive offers in the coming days as they have been barred from raising savings deposit rates beyond 8 percent and fixed deposit rates beyond 11 percent by the Nepal Bankers’ Association (NBA), an umbrella body of commercial banks, which has lately started acting as a cartel.

The NBA had capped deposit rates after banks started offering higher interest to attract deposit, amid rapid slowdown in deposit growth rate due to deceleration in remittance inflow and slow government spending. A very slow deposit growth has prevented banks from expanding credit, exerting pressure on profitability of banking institutions. But instead of letting the market fix the problem itself, the NBA decided to limit competition by putting ceiling on deposit rates.

The main objective of capping deposit rates was to prevent movement of deposits from one banking institution to the other soliciting higher returns. Such migration of deposits, the NBA feared, would increase volatility in the banking sector and increase cost of funds of banking institutions.

But the ongoing race to lure deposits through attractive schemes has poured cold water on NBA’s plan to stop movement of deposit, signalling the cap on deposit rates alone cannot inhibit competition in the market and prevent cost of fund from going up.

“Actually, it was not necessary to put a ceiling on deposit rates, as those who had attracted funds by offering higher deposit rates would have been compelled to raise lending rates as well, making loans expensive. This would have automatically lowered appetite for credit, bringing down lending rates and thereby deposit rates,” said a banker on condition of anonymity.

It is difficult to prevent banks from entering into competition to attract deposit in the present scenario, because many CEOs are under pressure from promoters to expand lending to increase profitability following four-fold hike in paid-up capital from Rs2 billion to Rs8 billion. This has prompted many banks to lend haphazardly despite knowing deposit growth rate has fallen. This is the root cause that had triggered shortage of loanable funds in the banking sector.

The Nepal Rastra Bank, the banking sector regulator, has long been saying that banks will continue facing shortage of loanable funds unless they stop lending beyond their limit and strike a balance between deposit collection and credit disbursement.

Published: 23-03-2018 08:38

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