Money
Bank deposit rate crosses 10pc mark
Deposit rates have surpassed 10-percent mark, as some of the commercial banks facing liquidity crunch have started collecting funds from the market in an aggressive manner.Deposit rates have surpassed 10-percent mark, as some of the commercial banks facing liquidity crunch have started collecting funds from the market in an aggressive manner.
Recently, when the Social Security Fund, a government undertaking, had sought to park its money, at least six commercial banks are said to have quoted interest rates of over 10 percent.
Lately, some of the banks have also started offering rates of up to 8.25 percent
on fixed deposit of retail depositors.
Rise in deposit rate is good news for depositors and comes at a time when inflation has cooled down to nearly a decade low of 4.8 percent. This has enabled depositors, who have always complained about losing money by parking funds at banks because of negative real interest rates, to finally bask in positive interest rates.
Deposit rates have been gradually going up since August. And by the end of September, rates had gone up to 7.5 percent. Since then, the rates have further gone up.
“The continuous hike in deposit rate, however, should not mean that the entire banking sector is facing liquidity crunch,” said Nabil Bank CEO Sashin Joshi. “Only banks that had engaged in imprudent lending practices are facing cash shortage at the moment and are trying to attract funds by pledging higher rates.”
Data also show that commercial banks are currently sitting atop Rs36 billion that could be immediately extended as loans. So far this fiscal year, monthly average credit disbursement of commercial banks has hovered around Rs26 billion.
“So, the problem appears to be idiosyncratic and not systemic,” said Joshi.
However, fall in growth rate of remittance income has affected some of the banks. In the first four months of the current fiscal year, remittance income grew by 7.8 percent (to Rs232.1 billion).
In the same period last fiscal year, remittance income had jumped by 19.4 percent.
The deceleration in remittance income has affected banks that had engaged in aggressive lending, especially after the end of the Indian border blockade.
Until some time ago, these banks had offered cheap credit to attract borrowers. As a result, demand for real estate, consumer, and margin loans went up.
This has created a mismatch in deposit-lending growth rate.
Since the beginning of this fiscal year in mid-July, banks have extended Rs130 billion in loans, whereas deposit growth rate has hovered around Rs96 billion, show the latest statistics of the Nepal Bankers’ Association.
“To end the problem [of liquidity crunch faced by some of the institutions], the government spending, especially capital spending, must go up,” said Sanima Bank CEO Bhuvan Kumar Dahal.
Generally, capital spending cause credit portfolio to shrink because contractors, who have borrowed money to implement various government projects, start repaying the debt.
Likewise, payments made by contractors to various parties following release
of government funds raise the stock of deposit at banking institutions.
“If the government cannot ramp up spending, it can create a mechanism
and channel government’s savings towards financial institutions facing liquidity crunch,” said Dahal.
The government currently has savings of over Rs190 billion as it has not been able to speed up capital spending, while revenue collection has remained robust so far this fiscal year.