Lenders drive hard bargain with banks

  • Tightening liquidity
- POST REPORT, Kathmandu

Mar 31, 2015-

A rise in lending and near stagnant deposits has led to a tight liquidity situation at some banks, and institutional depositors are seeing this as an opportunity to bargain for higher interest rates.

The Citizen Investment Trust (CIT) recently issued a notice calling for bids from banks for its deposits fixing the minimum interest rate at 7 percent for one-year deposits.

Until a few months ago, banks were reluctant to offer a high interest rate to institutional depositors as almost all of them were awash in liquidity. From the first half of the current fiscal year, however, banks started to experience a relatively tighter liquidity situation as companies withdrew money to pay taxes to the government.

The government has not been able to spend this cash and it is sitting idle in its vaults. As a result, around Rs90 billion remains out of bounds to the economy.

“The maximum interest rate we have got from banks lately is 7.75 percent,” said Sushil Aryal, chief manager at the CIT. According to him, banks were offering at the most 6.5 percent until one and a half months ago. “The interest rate varies among banks with the established ones offering a relatively lower rate of interest.”

Likewise, another big institutional depositor the Employees Provident Fund (EPF) has been offered a maximum interest rate of 8 percent. “It has been just a week since we made a deposit at 8 percent interest,” said EPF Administrator Krishna Prasad Acharya. “Until two months ago, the maximum interest rate we received was 6-6.5 percent.”

Meanwhile, bankers said that institutional depositors had started driving a hard bargain. The credit to deposit ratio of most banks is higher than 75 percent. During the first eight months of the current fiscal year, deposits increased Rs100 billion while lending swelled Rs140 billion resulting in a cash crunch.

Ajaya Shrestha, chief executive officer of the Bank of Asia, said that it was natural for institutional depositors to demand a higher rate of interest since many banks were grappling with a tight liquidity situation and they have the cash to make life easier for them.

According to Nepal Rastra Bank (NRB), banks still hold Rs15 billion worth of excess liquidity, but the situation may vary from bank to bank. “We expect a tighter liquidity situation after mid-April when people pay their taxes to the government.

We have planned to release the liquidity received and conduct a repo if necessary to pump cash into the banking system,” said Min Bahadur Shrestha, spokesperson of the central bank.

A few years ago, when banks were in the midst of a liquidity crunch, institutional depositors used to demand an interest rate of as high as 14 percent. To prevent such claims, bankers had made a gentleman’s agreement not to offer more than 12 percent interest to institutional depositors.

 

Published: 01-04-2015 08:55

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