Deposit rates down, but not lending

KATHMANDU, MAR 13: 

With an increase in deposits and liquidity situation easing, the banks have started to decrease interest rates on deposits. However, they are sitting tight on lending rates due to increasing cost of fund, which is the interest paid for lending. 

The banks that were offering as high as 12 per cent interest to attract deposits during last fiscal year’s liquidity crunch have now come down to as low as six per cent on average due to higher cost of fund. A lower cost of fund will generate better returns when lent on short-term and long-term. The spread between the cost of fund and interest rate on deposit is one of the main sources of profit.

According to the second quarter reports of listed 25 banks, out of 32, the cost of fund has increased to 8.38 per cent compared to 7.93 per cent in the same period last fiscal year. According to some bankers, the lending rates will go down only after the third quarter. But others said the lending rates will not go down even after the third quarter because of tight Capital Adequacy Ratio of the most of the banks as they do not have enough room to lend, which subsequently will put pressure on decreasing the interest rates on deposits.

But decrease in interest rates on deposits, and not on lending rates, could increase the spread, which according to the central bank should be at around three per cent on average.

Had the lending rates also been lowered, the private sector borrowing would have increased, benefiting the economy that is going to witness low manufacturing contribution to the gross domestic product due to contraction in private sector demand.

The central bank’s six months’ data revealed that loan and advances of all the banks and financial institutions increased by 6.5 per cent to Rs 55.25 billion compared to the growth of 8.6 per cent to Rs 63.75 billion in the same period last fiscal year.

Similarly, the deposit mobilisation of banks and financial institutions has increased by 10.4 per cent to Rs 85.68 billion during the six months of the current fiscal year 2011-12 against only 3.7 per cent to Rs 26.64 billion in the same period of the last fiscal year, according to the central bank data. “Deposit mobilisation of commercial banks, development banks, and finance companies increased by 11.4 per cent, 11.6 per cent and 1.7 per cent, respectively, against 0.6 per cent, 11.2 per cent and 8.3 per cent in the same period last fiscal year.”

However, the increase in deposits has made no change to banks’ CAR.

The second quarter report of the listed 25 banks revealed that they have the average of 14.04 per cent CAR, which should be 10 per cent, according to the central bank’s directive. The listed 25 banks have Rs 617.54 billion total deposits, which mean they have Rs 24.94 billion loanable amount. 

Source: THT