Relax borrowing rates

It seems that Nepal’s banking sector, which witnessed an unprecedented liquidity shortage right after the realty bubble burst in 2009, has largely recuperated from the crisis, as the overall deposit volume has swelled by over Rs 41 billion since mid-July. Undoubtedly, this is an encouraging development in that despite a series of unfortunate events, including the failure of at least five financial institutions to honor depositors’ checks, the banks and financial institutions have impressively regained the confidence of the general public.



The strenuous efforts that Nepal Rastra Bank, the central bank of the country, put into managing a safe landing from the banking crisis is laudable, though some of the development banks and finance companies are said to be in financial disarray still.



When the banking sector was facing an acute shortage of liquidity, a few obvious things happened and one of them was the rapid upward revision of the lending rate along with the deposit rate to lure additional deposits. Many experts and institutions, including this newspaper, welcomed the rise in deposit rate, as it provided a much-needed relief to depositors who had been reeling under a negative interest rate for years.



However, the revision of the lending rate, which went up by five percentage points on average – higher than the rise in deposit rates – since 2009, was alarming and rendered many business ventures financially unviable in the face of cheap imports. Businesses that managed to survive the rapid rise in cost of production then saw their profits flagging alarmingly.



The situation has changed a lot in recent months, as most banks and financial institutions no longer have a problem of liquidity. Some even have higher deposits than prior to the crisis, thanks to a number of attractive schemes that the banks floated to lure individual deposits. The record low discount rate quoted by commercial banks while purchasing treasury bills is a testimony of this fact.



But, sadly, the banks and financial institutions have been less enthusiastic about relaxing the interest rate on industrial and consumer loans, though some of then have taken steps to slightly lower interest rates on short-term loans for trade. As we have said earlier, there are still ways to relax lending rates without causing any notable slash in deposit rates.



The central bank can play a role in this matter by reviewing the current Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), which together are forcing banks to surrender 20 percent of costly deposits at nominal returns. So, we urge the central bank to reconsider the current level of SLR so as to give banks a breathing space for relaxing the borrowing rates.

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