Will the 4.34 % increase in IBR affect the share market?

ShareSansar, February 18:

The reduced liquidity in banking and financial sector has led to increase in Inter Bank Rate (IBR) by more than 4 percent. According to the latest update of the money market instrument published by Nepal Rastra Bank (NRB), the banking sector regulator, the weighted IBR rate is at 4.34 percent. The IRB was below 1 percent two months ago.

Although the impact of IBR is not generally seen on interests applied by banks on the end consumers immediately, if the current trend persists, banks will be compelled to adjust their rate of interest on both loans and deposits.

If IBR, which was below 1 percent two months ago, stays high for a protracted period, signaling shortage of liquid money, banks will have to increase their lending rates to make up for the rates at which they themselves borrow.

Such a scenario will have a negative effect on the share market, too. Active retail investors who take loans to invest in shares will be the hardest hit.        

But top bank officials say there is no reason to panic right away. The liquidity crunch seen in the market could be temporary and, in any case, banks are in no hurry to react to the change in the IBR. Most top ranking bank officials said that it would take a couple of weeks, even months, to change the existing rates, but by then market could again see a smooth cash flow.     

Nonetheless, not considering their capital, commercial banks are not in a position to provide loans at present. The reduced capacity of banks to provide loan is bound to have a negative impact on the investment climate in the market, which will ultimately affect the entire economic growth rate of the country.

Apart from increment in IRB, reduced liquidity will also lead to increase in the interest rate of treasury bills.
According to NRB, in the present context, the banks collectively hold deposits of Rs 12 kharba, 83 arba while the total loans floated by them stands at 10 kharba, 37 arba.

From the beginning of the current fiscal year, increase in loan rates has been comparatively higher than deposit rates from the beginning of current fiscal year.

According to NRB, in the first six months of current fiscal year, the deposits grew by 6 percent whereas loans rose by 9.5 percent. In the same period, total deposits of banks and financial institutions witnessed growth in deposit collection by 83 arba and an increment in loans by is 1 khara 25 arba.