Banks flush with funds‚ interbank rate takes dip

KATHMANDU, AUG 08:

With interbank rates and the yields on treasury bills heading south, banks are grappling with ways to dispose surplus funds profitably.

In the past one month, deposits at commercial banks have increased by Rs 30 billion, while lending during the period also increased by Rs five billion. In the period between the first week of July and first week of August, deposits at banks recorded an increment of three per cent while lending grew by less than one per cent.

The surplus liquidity at banks has even brought down interbank lending rate to 0.28 per cent in the last couple of days. With the end of the fiscal year and flood of expenditures that it brings, banks have been flushed with liquidity.

Deposit and Lending of commercial banks

“The problem at present is not liquidity but too much of it. The absence of proper profit generating instruments to invest in and projects to finance in the current situation is plaguing most banks,” said a banker.

Higher interbank rate points out the acute need of cash for banks and financial institutions and vice versa. Moreover, these rates are one of the guiding factors for interest rates. Interbank lending allows the needy ones to borrow and the ones with surplus cash to lend and earn interest — for the short term. If most of the financial institutions have enough cash to mobilise the rates go down.

In the first few months of 2013, the financial sector briefly witnessed a liquidity crunch that had pushed the interbank rate to 6.8 per cent. Three years back during the acute liquidity crunch, interbank lending in the Nepali financial market had reached as high as 12 per cent.

Along with interbank rate among commercial banks, lending between all classes of financial institutions has also slowed down to 2.8 per cent, at present. As of the end of June, this rate was as high as five per cent according to central bank statistics.

Meantime, the rate of 91-day treasury bills — the major investment instrument for banks to manage short-term liquidity and earn returns — has also taken a dip to 0.18 per cent.

These rates are supposed to guide the direction of interest rates in the whole financial sector. However, here, banks have a difficult time following the movement of interbank rate and treasury bills’ discount rate — especially when they are going down.

“It is difficult for banks to reduce the interest rate — especially lending — when we have almost non-existent alternate income earning instruments so we have to compensate all costs through interests,” said the CEO of a commercial bank.

Source: THT