Couple of commercial banks, earlier this week, scrambled to lay their hands on at least Rs4 billion belonging to Nepal Telecom (NT) and Citizen Investment Trust (CIT).

Banks that succeeded in securing the funds offered annual interest of 12.75 percent to 13.5 percent to the state-run telecom company and 12 percent to 13.25 percent to the state-owned contractual savings institution, according to bankers privy to the issue.

Interest rates offered by these banks are way above 8 percent recorded in September. What is also noteworthy is that these banks have agreed to park money belonging to CIT for a period of two years and that of NT for a year.

These are indications that lending rates may not come down anytime soon in the domestic market. This is expected to dampen confidence of investors planning to expand businesses or set up new enterprises.

Banks are rushing to attract funds these days, as their stock of fund that could be immediately extended as loans is fast depleting due to aggressive lending after the end of the Indian blockade.

All the while, deposit growth has slowed down due to deceleration in flow of money sent home by Nepalis working abroad. Also, the volume of fresh deposits entering the banking system from domestic sources has shrunk because of slow government spending.

What’s more, a big chunk of deposits parked by institutions, like NT and CIT, is not fresh deposit, but funds relocated from other banks.

Faced with this problem, banks have started offering up to 12 percent interest on fixed deposits of individuals as well.

“This has led to migration of huge chunk of money from savings accounts, [in which interest rates are way lower], to fixed deposit accounts. This has raised our cost of fund,” said Laxmi Bank CEO Sudesh Khaling, adding, “Impact of these recent developments will continue to exert pressure on lending rates in the days to come.”

Currently, commercial banks are offering loans to the corporate sector at around 10 percent to 12.5 percent per annum, while lending rates for small and medium enterprises range from 12 percent to 15 percent. Consumer loans, such as home and auto loans, on the other hand, are being offered at interest rates as high as 15 percent to 16 percent per annum.

These lending rates are way above average interest of 8.6 percent in October.

This is not the first time Nepal is facing this problem. The banking sector faced similar problem in 2010-11, when a severe credit crunch triggered by slump in real-estate business had pushed up lending rates.

“At that time, it took around 18 months for lending rates to normalise,” said Khaling. “So, we cannot rule out the possibility of something like that happening this time as well.”

What is also likely to exert pressure on lending rates is the upcoming income tax payment cycle.

Taxman here has made it mandatory for taxpayers to deposit 40 percent of self-declared annual income tax amount as first instalment within mid-January. Firms have to deposit second income tax instalment of 30 percent in mid-April and final instalment in mid-July.

“Considering the previous trends, we expect around Rs40 billion to leave the vaults of banks and financial institutions by mid-April. This will further reduce the stock of cash at banking institutions,” said Sanima Bank CEO Bhuvan Kumar Dahal.

Bankers generally worry whenever funds enter the state coffers, because of the government’s inability to spend funds. But bankers are more optimistic this time.

“Generally, government spending, especially capital spending, surges in the last quarter of fiscal years [which begins in mid-April]. We expect this to happen this year as well, which will raise the deposit stock at banks,” said Dahal.

But it is not known whether rise in flow of money following hike in public spending will ease the problems of bankers this time. This is because of the relaxation on lending limit provided by the banking sector regulator to replenish the stock of loanable funds.

The Nepal Rastra Bank (NRB) recently allowed banking institutions to calculate credit to core capital-cum-deposit (CCD) ratio by deducting 50 percent of loans extended to the productive sector.

Banks and financial institutions are allowed to extend up to 80 percent of the total deposits and core capital as loans. This is the maximum regulatory lending limit or, in technical terms, maximum limit on the CCD ratio.

The recent relaxation means financial institutions will not be subject to regulatory action even if they breach CCD ratio by extending 50 percent of the productive sector loans to borrowers.

This change made at a stoke of a pen did add at least Rs127 billion to the stock of loanable funds at banking institutions, considering the data of the first half of the current fiscal year when banks and financial institutions had extended credit of around Rs254 billion to the productive sector.

But banks that have reaped benefits from the latest provision will have to restore those funds by mid-July. Simply put, the relaxation on lending limit offered by the NRB is expiring in mid-July. This means bankers may not be able to convert all the deposits generated through hike in government spending into loans. This will leave banks with very little funds that could be immediately extended as credit.

“So, chances of lending rates remaining at a higher level are very high,” said Dahal.