Deposit rates likely to go up soon

KATHMANDU:

Depositors may soon start getting higher returns on money parked at commercial banks, as tightening credit-deposit (CD) ratio is likely to trigger competition among class ‘A’ financial institutions to attract funds.

Nepal Rastra Bank, the banking sector regulator, requires commercial banks to maintain CD ratio — technically referred to as credit to core-capital-cum-deposit (CCD) ratio — of 80 per cent.

This means of every Rs 100 in deposits and core capital only Rs 80 can be extended as loans.

The average CD ratio of 30 commercial banks stood at 77.35 per cent in the first half of the current fiscal to mid-January, as against 73.64 per cent in the same period a year ago, show latest unaudited financial reports of banks.

Although this level of CD ratio should provide sufficient room for banks to expand lending, the credit-deposit gap of some of these class ‘A’ financial institutions is thinning rapidly.

For instance, CD ratio of at least six commercial banks — excluding that of financially-troubled Grand Bank, whose CD ratio has breached regulatory requirement and hovers around 91.64 per cent — stands at over 79 per cent. And another six banks have reported CD ratio of over 78 per cent.

These banks are likely to face problems in extending new loans in the coming days unless they rapidly raise their deposit level or inject fresh capital.

“This development will most likely trigger competition among banks to attract deposits,” Anil Shah, CEO of Mega Bank, whose CD ratio stood at 79.41 per cent as of mid-January, told The Himalayan Times.

This is definitely good news for depositors as competition among banks to attract funds would end the long spell of depressed deposit rates.

The weighted average deposit rate of commercial banks fell to as low as 3.75 per cent in mid-January, as against 6.17 per cent in July 2012, shows the latest Macroeconomic Report of NRB.

“However, depositors should not expect big hike in deposit rates at the moment because we are still watching the developments. And in the end it could turn out to be nothing more than a short-term phenomenon,” Shah said, adding, “So, we must wait for another quarter to end to get a clearer picture.”

CD ratio of some of the banks may be eroding faster because of mismatch in deposit and credit growth.

In the first six months of the current fiscal year, deposits of banks and financial institutions went up by six per cent, while credit expanded by 11.6 per cent.

Deposit growth has remained tepid so far this fiscal because of slow growth in remittance income. The country’s remittance income went up by mere 3.9 per cent to Rs 275.96 billion in the six-month period. In the same period last fiscal, remittance income had expanded by 34.4 per cent.

While deposits are growing at a slower pace, demand for loans from the private sector has gone up this fiscal. Because of this mismatch in deposit and credit growth, funds in reserves of many banks are fast depleting, which is causing interbank lending rates to shoot upwards. This means some correction in deposit rates may be inevitable.

Source: THT