Sitting on piles of cash, bank and financial institutions (BFIs) are scrambling to bring down their interest rates.
In normal situation, drop in interest rates tempts borrowers to get more credit from bank, while it depositors to park their money in banks. However, borrowers are reluctant to take loans from banks despite rapid fall in interest rates in recent days. Owing to excess liquidity that generates no return, BFIs are now scrambling to reduce interest rates in a bid to entice investors. NMB Bank, for example, has announced home loans at as low as 6.66 percent with a repayment period of 25 years. It used to charge 15 to 18 percent interest for similar loan two years ago.
“Deposit is piling up as remittance flow is increasing continuously. However, we have not been able to float loans on par with deposit growth. The result is fall in interest rate,” Upendra Poudyal, CEO of NMB Bank Ltd, said.
“When there is no demand for loans, there should be treasury bills and other instruments where banks can invest. However, we do not have adequate investment instruments as the government's capital expenditure is very low. It is better to extend loan at very low margin than keeping the fund, for which we have to pay interest to depositors, idle,” he added.
Recent data shows that the government has failed to make domestic borrowing as per its budget announcement, thanks to its poor performance in capital expenditure.
While the NRB is mopping up fund through open market operation regularly, such operation has largely failed to address liquidity surplus which is borne out of structural economic problems.
According to NRB Executive Director Min Bahadur Shrestha, the banking industry is still has liquidity surplus of around Rs 40 billion even though the central bank holds an outstanding amount of Rs 131.35 billion that it mopped up through various open market operation instruments like reverse repo and deposit auction.
“These instruments are meant to address liquidity surplus in a short-term. Increasing loans and advances by BFIs are the only way it can be addressed in the long-run,” Shrestha, who heads Public Debt Management Department of NRB, told Republica.
Falling interest rates, however, have failed to attract investors. “Even though the interest rates are falling at an unprecedented rate, there are no borrowers signing up for loans. It seems that investors do not want to take risk in the current circumstances when the recent devastating earthquake,
Tarai turmoil and unofficial economic blockade imposed by India have hit the country,” Poudyal said.
The situation with interest rate on deposit is also not much different. While some of the BFIs are already turning away many corporate deposits, the interest rates of deposits of most of the commercial banks stand at around 2 percent.
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