Banks ready to lend to govt at near zero rates

KATHMANDU:

Haunted with excess liquidity, the financial institutions are ready to lend to the government at near zero interest rates.

By lending Rs 1.1 billion to the central bank, a bank will earn a mere Rs 505 as interest per day on average based on the rate structure of the recent reverse repo.

In the latest round of the seven-day reverse repo, Nepal Rastra Bank (NRB) received a bid for securities worth Rs 23 billion from 21 financial institutions for the reverse repo worth Rs 10 billion, informed spokesperson for NRB Bhaskar Mani Gyanwali, “The weighted average reverse repo rate for this round stood at 0.0166 per cent,” he added. This is the lowest recorded rate so far for a reverse repo in the Nepali financial market. During a reverse repo, the central bank accepts deposits from banks against a collateral of securities with the central bank at a certain rate.

“Though the rates are almost zero per cent and the return negligible, banks are bidding for the reverse repo as something is better than nothing,” pointed out CEO of Commerz and Trust Bank Nepal Anal

Raj Bhattarai.

According to Nepal Bankers’ Association statistics, there is about Rs 75 billion worth of excess liquidity with commercial banks. “Deposits that are not being lent are a dead asset, and the central bank’s instrument such as a reverse repo at least provides some returns on it,” he added.

Due to prolonged surplus of loanable funds, NRB started to utilise the liquidity absorbing instruments since the beginning of September this year. It has already undertaken reverse repo worth Rs 35 billion between mid-August to mid-October. Likewise, it had also held an outright purchase auction for securities worth Rs 8.5 billion to mop up liquidity.

Though these liquidity absorbing measures are effective, it has not broken the freefall of the interest rates in the money market. The 91-day treasury bills’ rate has gone down one per cent since July. At present, the government is borrowing at near-zero per cent but the public has to pay a minimum 14 per cent to the banks.

“The almost nonexistent yield of treasury is the reason that banks are lowering their deposit rates while they are unable to cut lending rates, because banks try to compensate the low income from treasuries by charging higher for loans,” said Bhattarai.

Lower interest rate with higher inflation further adds pressure to the already rising prices. Public’s propensity to save gets hurt if the returns they are earning from keeping money in banks do not even compensate for the loss of value due to inflation.

“We can hope that the surplus liquidity will start moving towards credit by the end of the first half of the current fiscal year — mid-December — as government projects start taking off,” according to Gyanwali.

Source: THT