Why are banks suddenly desperate for deposits?
Why are banks suddenly desperate for deposits?
ShareSansar, April 9:
If you have been going through newspapers carefully recently, you must have noticed that every day their pages carry advertisements by banks and finance institutions (BFIs) aimed at luring depositors.
Not only these BFI advertisements try to attract your attention through names such as Mega Dhamaka Bonanza Fixed Deposit, Prabhu Smile Saving, Shubhalaxmi Bachat Khata, but they also present real offers such as attractive interest rates, discounts or complete waiver of certain charges, affordable minimum balance, additional facilities such as locker services, health insurance, loan against fixed deposit and many more.
So why are newspapers suddenly flooded with BFIs advertisements trying to woo depositors with offer galore?
It is definitely not that the market is headed for a liquidity crisis. An indication of surplus liquidity is that the Nepal Rastra Bank recently published a notice on its website calling on bids from BFIs for collection of deposits of about Rs 5 billion. Deposit collection is an instrument whereby the central bank absorbs the liquidity from BFIs. As per an NRB official, there is a total of Rs 30 billion of liquidity surplus in the banking system.
Despite robust liquidity situation, BFIs are in a sudden rush to attract deposits because of their tightening credit to deposit ratio, or CD Ratio.
CD ratio indicates how much money a bank can disburse in loans and advances from the deposits it has mobilized.
Main banking activity of a bank is lending as interest on loans is the main source of their revenue. A higher ratio indicates more reliance on deposits for lending and vice-versa.
At present, the CD ratio of most banks hovers above 75%, approaching close to the 80% cap set by the NRB. It means that most of the banks have already exhausted the available funds by disbursing them in loans and advances and that they need more funds if they want to do further business.
The banks whose CD ratio is veering close to the 80% cap include Mega Bank (79.41%) Civil Bank (79.70%), Bank of Kathmandu (79.88%), and Prabhu Bank (76.97%). Likewise, some other banks with CD ratio above 75% are Citizens Bank International (78.77%), NCC (78.05%), Laxmi Bank (77.98%) and Global IME (77.90%).
Compared to these banks, the CD ratio of Nabil Bank stands at 73.45%, which is considered healthy for a commercial bank. Likewise, CD ratio of Rastriya Banijya Bank and Nepal bank stand at 60.40% and 61.87%, respectively, because they are usually flush with government funds.
Since banks are required to maintain a cash reserve ratio (CRR) of 6% and a statutory liquidity ratio (SLR) of 12%, they cannot allow their CD ratio to cross the 80% ceiling fixed by the NRB.
The ratio gives the first indication of the health of a bank. While a very high ratio is considered alarming, indicating pressure on resources, a very low ratio indicates banks are not making full use of their resources.
