Banks still opt for reverse repo

KATHMANDU:

The contraction in credit rate has helped fuel banks’ lending of late, yet financial institutions are still eager to dispose excess funds for marginal returns.

Although the problem of excess liquidity at the banks has started to subside, banks are grabbing the central bank’s reverse repo for meagre returns. The recent round of Nepal Rastra Bank (NRB)’s reverse repo held today was subscribed by almost double the offered amount of Rs 19.5 billion.

“Twenty-five financial institutions bid for the securities worth Rs 38.9 billion at weighted average rate of 0.23 per cent,” informed an official at NRB’s Open Market Operation Committee. On an average, at the reverse repo rate, each financial institution will earn Rs 33,880 in a week by lending Rs 780 million to the central bank for seven days.

As the banks battled to dispose their excess liquidity, NRB has used reverse repo 15 times since September to absorb surplus funds. Since the beginning of the current fiscal year, banks have been struggling due to lull in credit expansion coupled with speedy deposit growth.

“However, in the past couple of months, the rate of credit growth has been substantial while deposits are growing in pretty slow pace, due to lowered interest rate,” pointed out CEO of Sanima Bank Bhuvan Kumar Dahal.

The prolonged surplus funds in the financial system had started to create downward pressure on the interest rates, pulling the lending rate near 11.5 per cent.

“The surplus funds with the banks at present is less than Rs 50 billion, which is less alarming than it used to be only two months ago,” he added.

As of mid-January, commercial banks have floated loans worth Rs 816 billion and collected deposits worth Rs 1,097 billion. After maintaining 20 per cent mandatory liquidity, the banks had Rs 62 billion excess funds at hand. The amount was Rs 10 billion higher in mid-December 2013.

Thanks to the excess liquidity, businesses and consumers are able to avail loans at below 10 per cent interest rate. Banks have started to lure in consumers by offering home loans and auto loans to the middle class household at average nine per cent rate as safe bait.

However, businesses are still reluctant to take large-scale loans citing the ambiguity regarding the overall investment climate of the nation.

“The business fraternity is waiting for a concrete political development to be sure about the direction of the economy, which has been at a standstill since a long time,” pointed out vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Pradeep Jung Pandey.

The loans to the private sector by financial institutions had increased by 7.3 per cent —

Rs 83.66 billion — in the six months of 2013-14. During the corresponding period last year, the loans had grown by 11.2 per cent.

“We are waiting for clear policy guidance from the government which had failed to address the concerns of the private sector due to the political turmoil,” Prandey said, adding, “Businesses do not want to start borrowing from banks as we are ready to plan expansion or to start investing only if certainty prevails.”

Source: THT