Interest rates unlikely to fall anytime soon

Published On: July 12, 2017 03:30 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, July 11: It seems that interest rates are not going to fall anytime soon as bank and financial institutions (BFIs) grappling with the shortage of lendable fund are raising their saving rates to lure depositors. 

On Monday, NIC Asia Bank Ltd announced 9 percent interest rate on saving deposits, up by one percentage point. This is the highest saving rate offered by commercial banks. Other banks are also likely to follow the suit soon. 

As BFIs are not seeing a significant growth in their deposit volume even at the end of the fiscal year, bankers say they are left with no option but to increase deposit rates to lure public's savings. 

The hike in savings rate comes in the wake of banking executives' informal decision to cap fixed deposit rate at 12 percent and the Nepal Rastra Bank's policy pressure to increase saving rates.   

While bankers say that lending rates stand at around 15 percent for corporate borrowers and 12 percent for individual, private sector leaders rue that the borrowing is now becoming almost unaffordable. 

The hike in deposit rate has come as a boon for depositors who had been getting a scant return on their saving parked at BFIs. Business community and other borrowers, however, will have to bear the brunt of the rising cost of borrowing. 

Any rise in cost of deposits is passed on borrowers.

Bankers say that the Monetary Policy Fiscal Year 2017/18 is less likely to arrest the skyrocketing interest rates. Some provisions will instead help the rates to rise further, they added.

The prudential lending limit known as core-capital-cum-deposit (CCD) ratio of many BFIs has crossed the regulatory limit of 80 percent, making them difficult to extend new loans. Banks that are close to the limit should either collect fresh deposits to float more loans or stop lending. 

While the NRB has offered a relaxation on calculation of CCD ratio by allowing them to deduct 50 percent of productive sector loans in the calculation, such relief measure has been withdrawn from mid-July this year as announced in the mid-term review of the monetary policy. However, the three-month deadline for BFIs to bring down their CCD ratio to regulatory requirement of 80 percent by mid-October will prompt banks, whose lending limit has crossed regulatory limit, to raise interest rates to attract more deposits. 

Similarly, another provision introduced in the monetary policy that requires banks to bring down their share of institutional deposits by 5 percentage points to 45 percent is also going to increase the rates, according to bankers. 

“Banks must raise interest rates to increase the share of retail deposits to meet the new requirement,” Sudesh Khaling, the CEO of Laxmi Bank Ltd, told Republica. “As there is no possibility of liquidity position getting normalized anytime soon, the interest rates are likely to rise or at least remain at the higher end,” he added. 

He also says that the anomaly seen in the banking industry to court deposits on call account is also contributing in the rise of the deposit rates. Khaling also urged the central bank to discipline banks on this front.

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