Banks to set their own interest rates amidst excess liquidity

Mon, Jul 13, 2020 3:28 PM on Economy, Latest,

The Bankers' Association, which has been agreeing on interest rates on deposits for the past two years, has left the responsibility of setting interest rates to the banks from Shrawan 1st onwards. 

This was decided in the discussions held between the chief executive officers and representatives of all the 27 commercial banks today. 

Earlier, the bankers' have agreed to give 7% interest on institution Fixed deposits, 8.5% to an individual and maximum 5.5% on the Savings account. 

The Bankers' Association has left it to the banks to reduce interest rates without hurting the general depositors because the banks said that it was difficult to meet costs because of excess liquidity in the banking system.

Banks make money by accepting deposits from savers and lending money to borrowers at a higher interest rate. Commercial banks will now reduce interest rates for deposits because lending hasn't grown, although deposits have gone up.

If they continue paying the normal interest rate for deposits while not being able to find borrowers, they will be in loss. This is why they'll have to pay only a reduced percentage of interest to depositors for their savings.

By the third week of Ashad, deposits of commercial banks have grown while lending has been the lowest in two months. This shows that the deposits inflow is improving but banks haven't expanded the credit outflow.

Compared to the second week's deposit and lending figures, deposits have increased by 22 Arba in the third week while lending has remained the same. 

It seems that commercial banks are now on their own to determine interest rates. This simultaneously means that the bank that can stay profitable while maintaining the lowest interest rates will get the most customers.

"Banks are in a state where their immediate priority is survival. Only then can they focus on revival and ultimately, growth," says Nabil Bank CEO Mr. Anil Keshari Shah, when sharesansar asked for his take on the issue.

Shah says this excess liquidity is likely caused because people saw nowhere to invest because of the pandemic and found banks to be the safest holding option for their capital.

When asked whether this will create an unhealthy competition to slash interest rates among banks, Nabil CEO Mr. Shah said, "I like to believe banks should not engage in the dirty game of snatching customers from each other."

"This is a temporary situation and it won't last past the first quarter in my opinion," Shah says.

Disclaimer: The phone interview has been translated from Nepali while maintaining Anil Keshari Shah's original opinions.