Banks indulge in one-upmanship

  • savings deposit rate
- RUPAK D SHARMA, Kathmandu

Apr 24, 2017-

A war has broken out among commercial banks to jack up the interest rate on savings deposit, raising the spectre of migration of considerable amount of funds from bigger financial institutions to smaller ones.

On Sunday, Sanima Bank offered to extend interest of as high as 8 percent on savings deposit. 

The move comes a few weeks after NIC Asia Bank and Century Bank raised the interest to that level. This is probably the first time in the recent history that commercial banks have offered such high return to savings account-holders.

Savings deposit rate of commercial banks generally hovered around 2-3 percent in the past. The rates were not revised upward even when inflation in the country shot past 12 percent a year ago. 

Lately, inflation has cooled down to 12-year low of 2.9 percent. Considering this, return of 8 percent on savings accounts, makes depositors the biggest winners, said Acting Governor of the Nepal Rastra Bank Chinta Mani Siwkoti.

While only a few banks have raised the savings deposit rate to 8 percent, many see this as a prelude to further hikes in savings deposit rates in the days to come. 

Already banks like NMB, Machhapuchchhre, Kumari and NCC have jumped on 

the bandwagon, increasing interest on savings deposit between 4.5-6.5 percent. And on Sunday itself Laxmi Bank offered to extend 7 percent interest to savings account-holders. 

This cut-throat competition between these mid-size commercial banks on raising savings deposit rates is likely to trigger deposit flight from bigger banks, which are not in a position to compete with their smaller rivals as it would raise their interest expenditure exponentially.

Currently, the share of savings deposits in total deposits of all commercial banks stands at 35.5 percent, shows the latest central bank report. But this share ranges between 45 and 65 percent in bigger commercial banks like Rastriya Banijya, Nepal Bank, Nabil, Himalayan and Prabhu.

Rastriya Banijya Bank, the country’s largest bank in terms of asset, for instance, has savings deposit portfolio of Rs89.9 billion. If it decides to raise savings deposit rate by 1 percentage point, it would have to bear additional financial burden of around Rs899 million. This cost is way above banks’ like Sanima, which will see its interest expenditure going up by Rs183 million, considering its savings deposit portfolio of Rs18.3 billion.

“The way some banks are raising savings deposit rate doesn’t make economic sense, as inflation has cooled down to 2.9 percent,” said Sashin Joshi, CEO of Nabil Bank, which holds the second largest deposit portfolio in the banking sector. But he views the latest hikes as a short-term phenomenon. 

“We all know deposit rates are going up because of shortage of funds that could be immediately extended as loans,” said Joshi. “This situation will ease soon, as government’s expenditure generally goes up till mid-July, which will replenish the stock of deposit as well as loanable funds at banks.”

The banking sector is currently facing severe shortage of loanable funds. This is because of mismatch in deposit collection and credit expansion, triggered by lethal combination of deceleration in remittance inflow and higher demand for loans.

This has compelled many banks to rampantly hike interest rates to attract deposits. This, in turn, has pushed up cost of fund of banks, prompting lending rates of commercial banks to jump to a range of 13 percent to over 16 percent. This has dampened confidence of investors planning to expand business or set up new enterprises.

“We hope the recent decision to raise savings deposit rate to 8 percent will increase lending rate by only 0.5 percent to 1 percent, because we have started reducing fixed and call deposit rates,” said Sanima Bank CEO Bhuvan Kumar Dahal.

Published: 24-04-2017 07:46

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