Excess liquidity, low credit demand put bankers in catch-22
KATHMANDU, OCT 18 -
Impressive growth in deposits but suppressed lending has put bankers in a dilemma. First, they are yet to ascertain whether the surge in deposits is sustainable. And second, what should be done with the deposits at a time when demand for credit has slowed down.
After struggling throughout the last fiscal year to manage funds, banks are now in a comfortable position with excess liquidity. The liquidity situation improved mainly due to timely budget presentation and disbursement of government resources and surge in remittance due to strong dollar. In first quarter of 2011-12, commercial banks’ deposits surged to Rs 704 billion from Rs 673 billion in mid-July, while lending increased to only Rs 532 billion from Rs 521 billion.
With credit demand remaining suppressed, bankers say it is very painful to keep funds collected at higher interest rate idle in the vault. “There is no credit demand in the market as there has been no new investment at all. It will be difficult for us to sustain as we collect deposits at high interest rate and lend the surplus fund at one percent,” said Sashin Joshi, chief executive officer of NIC Bank.
The slowdown in credit demand can be gauged by the fact that the inter-bank lending rate has slumped to one percent from the high of 10 percent few months ago. Bankers still do not know when the interest rate should be corrected.
Joshi said commercial banks are still reluctant to lower interest rate on deposits, as they fear that such an action may scare away depositors and create liquidity crunch again. “There is still confusion about the sustainability of this liquidity,” said Joshi. “Therefore, we are not in a position to lower interest rate on deposits. But there has been slight decrease in lending rate to stimulate credit demand.”
The central bank has also suggested banks and financial institutions that this might be a short-term phenomenon and that they should not rush to reduce the rate on deposits. “They must wait for a few more months to know the durability of this liquidity before revising rates on deposits,” said a top NRB official.
Nepal Bankers’ Association (NBA) President Ashoke Rana also indicated that it will take some more time for interest rate correction. “We have to wait at least for a month before revising rates on deposits,” he said. “We should not rush to decrease the rates.”
However, Mega Bank Nepal CEO Anil Shah said rates on deposits have started to come down. He also opined that it is not a time to make decisions in a rush and added that the market itself will make the correction.
With the end of this fiscal year’s first quarter, bankers are concerned about whether the mismatch between the growth of deposits and lending would hit their profitability. “If this scenario prolongs, our profitability will shrink,” said Joshi.
One of the solutions to the situation, according to bankers, could be NRB issuing reverse-repo to pull the liquidity out of the system and give stability to interest rate. “In this situation, NRB should pull liquidity out of the system,” said Joshi, “But our demand has not been heard so far.”
However, NRB Spokesperson Bhaskar Mani Gnawali said it is the central bank who decides about monetary instruments to be used. “We will soon make a decision in this regard,” said Gnawali.
Source: Kantipur
Impressive growth in deposits but suppressed lending has put bankers in a dilemma. First, they are yet to ascertain whether the surge in deposits is sustainable. And second, what should be done with the deposits at a time when demand for credit has slowed down.
After struggling throughout the last fiscal year to manage funds, banks are now in a comfortable position with excess liquidity. The liquidity situation improved mainly due to timely budget presentation and disbursement of government resources and surge in remittance due to strong dollar. In first quarter of 2011-12, commercial banks’ deposits surged to Rs 704 billion from Rs 673 billion in mid-July, while lending increased to only Rs 532 billion from Rs 521 billion.
With credit demand remaining suppressed, bankers say it is very painful to keep funds collected at higher interest rate idle in the vault. “There is no credit demand in the market as there has been no new investment at all. It will be difficult for us to sustain as we collect deposits at high interest rate and lend the surplus fund at one percent,” said Sashin Joshi, chief executive officer of NIC Bank.
The slowdown in credit demand can be gauged by the fact that the inter-bank lending rate has slumped to one percent from the high of 10 percent few months ago. Bankers still do not know when the interest rate should be corrected.
Joshi said commercial banks are still reluctant to lower interest rate on deposits, as they fear that such an action may scare away depositors and create liquidity crunch again. “There is still confusion about the sustainability of this liquidity,” said Joshi. “Therefore, we are not in a position to lower interest rate on deposits. But there has been slight decrease in lending rate to stimulate credit demand.”
The central bank has also suggested banks and financial institutions that this might be a short-term phenomenon and that they should not rush to reduce the rate on deposits. “They must wait for a few more months to know the durability of this liquidity before revising rates on deposits,” said a top NRB official.
Nepal Bankers’ Association (NBA) President Ashoke Rana also indicated that it will take some more time for interest rate correction. “We have to wait at least for a month before revising rates on deposits,” he said. “We should not rush to decrease the rates.”
However, Mega Bank Nepal CEO Anil Shah said rates on deposits have started to come down. He also opined that it is not a time to make decisions in a rush and added that the market itself will make the correction.
With the end of this fiscal year’s first quarter, bankers are concerned about whether the mismatch between the growth of deposits and lending would hit their profitability. “If this scenario prolongs, our profitability will shrink,” said Joshi.
One of the solutions to the situation, according to bankers, could be NRB issuing reverse-repo to pull the liquidity out of the system and give stability to interest rate. “In this situation, NRB should pull liquidity out of the system,” said Joshi, “But our demand has not been heard so far.”
However, NRB Spokesperson Bhaskar Mani Gnawali said it is the central bank who decides about monetary instruments to be used. “We will soon make a decision in this regard,” said Gnawali.
Source: Kantipur
