'Comfortable' liquidity situation pushes deposit rates up

Published On: August 20, 2016 01:40 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, Aug 20: Here is some good news for people who are fed up with ultra-low interest rates offered by bank and financial institutions (BFIs).

BFIs are gradually raising interest rates on deposits as liquidity surplus is coming down due to the central bank's relentless efforts to mop up fund in the banking system through various instruments.

Most of the commercial banks are offering 5 percent interest rates on yearlong fixed deposits, while some are providing 6 percent on such deposits.

Earlier, such rates had gone down to as low as 3 percent as BFIs were sitting on huge pile of loan-able funds.

Excess liquidity situation continued for nearly three years, giving both the BFIs and depositors hard time. However, liquidity is now in a 'comfortable position', driving up interest rates, albeit gradually.

Officials of the Nepal Rastra Bank (NRB) say that their effort to bring interest rates at a 'desired level' is finally paying off. "Interest rates on deposits have gone up to a level far higher than it was a year ago. This has been possible due to our open market operation on a regular basis. We have been introducing instruments regularly to manage liquidity in the market," Min Bahadur Shrestha, an executive director of NRB, told Republica.

"We offer liquidity to BFIs whenever there is a need through our instruments like repo whereas we soak the excess up and maintain liquidity at a comfortable situation when there is excess liquidity through instrument like reverse repo and term deposits," added Shrestha, who heads the Public Debt Management Department of NRB, said.

According to Shrestha, liquidity situation is manageable as they have already mopped up all such surplus fund through various instruments. "The rates are going to the desired level. As we have introduced interest rates corridor system, interest rates will not fluctuate beyond a range," he added.

Bankers, however, say that it would be too quick to term the rise in interest rates as 'an upward trend'. "We agree that the surplus in the banking industry is not like as it was earlier. However, some of the big banks still have excess liquidity,” Sudesh Khaling, CEO of Laxmi Bank Ltd, said.

"Rates are going up mainly due to two reasons. One is because the capital of BFIs is increasing and they have higher target to meet in the upcoming year which means they should have more funds at their disposal. So they are arranging cash as a precautionary strategy so that they would be in a comfortable position next year when they will be making higher investment," said Khaling. "Another is the recently introduced interest rates corridor system which aims to keep the interest rates at a certain band. Bankers think it would be better to remain in the better liquidity position," he explained.

However, he cautions against understanding the rise in the rates as a 'trend'. "There are definitely reasons to be optimistic when the central bank has introduced interest rates corridor system and the treasury bills' rates are going up. Still, we have to wait for some time to see whether it will last longer because liquidity position in Nepal fluctuates rather quickly," he added.

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