Deposits swell, but interest rates unlikely to fall anytime soon

Published On: July 15, 2017 11:12 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, July 14: Banks have added Rs 19 billion in new deposits in the first week of July while their lending increased by only Rs 1 billion. 

According to a data of Nepal Bankers Association (NBA), the total deposit mobilization of 28 commercial banks rose to Rs 2,018 billion in a week (between June 30 and July 1) from Rs 1,999 billion compared to the total loan growth to Rs 1,691 billion from Rs 1,690 billion. 

The figure of the NBA shows that the deposit mobilization of 28 commercial banks has gone up by Rs 20 billion in the previous week (between June 23 and June 30) while the lending also rose by Rs 15 billion. 

The significant growth of deposit comes as a relief for bankers who have been facing shortage of lendable fund for past few months even after offering as high as 13 percent of interest rates on fixed deposits and up to 9 percent savings rate. 

Banking executives say that the banks focused on the recovery of loans in the last month of the fiscal year instead of making new investments, leading to a slowdown of lending. 
One of the main reasons for a sharp growth on deposit figure of banks is the rise on the spending of the government which has remained very sluggish until last month, according to bankers. 

The government’s spending including the capital expenditure tends to climb up in the last month of the fiscal year due to rise of both physical progress and financial progress when the payments and reimbursements to contractors are made in large numbers. 
The rise in the government spending has pumped cash into the banking system which was suffering from crunch. 

Due to the mismatch between the deposit and credit growth rates, many banks have seen their credit to core-capital-cum-deposit (CCD) ratio -- a prudential lending limit -- breaching the regulatory requirement.  

The aggressive lending approach of banks amid rising demands on the account of improving investment climate in the country, and pressure of ensuring returns to shareholders due to rise in paid-up capital in recent months, together with sluggish capital expenditures of the government have caused the ‘financial friction’. 

However, bankers do not seem optimistic about the ‘credit crunch’ problem going away anytime soon, indicating that the interest rates are likely to remain at the higher end for at least few more months.

“I do not foresee interest rates going down anytime soon. Instead, the rates are likely to continue to rise, albeit not at a speed like in the recent months,” said Sudesh Khaling, the CEO of Laxmi Bank Ltd.  

Some bankers also said that the recent monetary policy for the upcoming fiscal year -- 2017/18 -- did not come up with any measure to address the credit crunch problem. 
According to bankers, the pressure for some banks, who have breached the CCD ratio, to 80 percent within 3 months and the requirement for banks to bring down the share of institutional deposits to 45 percent from 50 percent will push up interest rates further.

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