Interest rates edge up as lending surpasses deposit growth

Published On: September 3, 2016 01:20 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Sept 3: Loan disbursements of commercial banks surpassed deposit mobilization in the first one and half months of the current fiscal year.

According to figures of 28 commercial banks compiled by Nepal Bankers Association (NBA), class 'A' banks mobilized a total of Rs 21 billion in deposits and extended Rs 24 billion in loans between mid-July and August 26. Commercial banks have mobilized total deposits of Rs 1,752 billion as of August 26, up from Rs 1,752 billion on July 15, while their loans and advancements grew from Rs 1,386 billion on July 15 to Rs 1,410 billion on August 26.

Loan flow of commercial banks started to go upward after the Tarai turmoil and the unofficial Indian economic blockade ended in the first week of February. Experts say that the drop in remittance growth rate and the government's failure to increase capital spending in recent months has slowed down deposit growth in banks.

Remittance flow has been fueling deposit growth of banks, while investors, wary of recent political uncertainty, are reluctant to borrow. Such mismatch in deposit and lending growth has resulted to liquidity surplus in the banking system. However, liquidity is coming to a manage-able situation in recent months, according to bankers. They say that the excess liquidity situation will be over and the interest rates, which were at ultra-low levels until recently, are likely to go up further if the current trend continues.

The recent decision of the Nepal Rastra Bank (NRB) to implement interest rates corridor system is also likely to drive up interest rates. The central bank has been introducing open market instruments regularly for liquidity management as part of implementation of interest rates corridor system.

"The deposit growth has slowed in recent months, while lending growth is on the rise. This will make impact on interest rates," Bhuvan Dahal, CEO of Sanima Bank Ltd, said.

As the liquidity situation has come to a 'comfortable position', interbank rate is already going up. According to bankers, interbank rates, the rate which a bank charges while lending to another, mainly to meet the shortfall of reserve requirements at NRB, have reached 2 percent, up from below 1 percent rates in recent months. "NRB has been mopping up liquidity through various instruments. Loan demands are also rising. It is a positive development in the banking sector," added Dahal.

As liquidity level of the banks is coming down, they are now offering interest rates of up to 6 percent on one-year fixed deposit, apparently to lure depositors so that they can have funds at their disposal if there is crunch in loan-able fund.

Such deposit rate had dipped to as low as 3 percent recently when BFIs were sitting on huge pile of cash.

Dahal, however, says that the deposit may rise again if the government boosts its spending and remittance flow increases in the eve of festive season. 

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