Excess liquidity on, banks still charging higher interest rates

KATHMANDU, FEB 25 -

Despite the persistent high levels of excess liquidity in the banking system, interest rates, particularly on loans, have not come down as expected.

This has forced Sita Phuyal of Koteshwor to write to her lender, seeking explanation of why the interest rate continued to remain at higher level despite a comfortable liquidity situation. “I have asked my bank to explain about the persistent high interest rate,” she said.

According to the Nepal Rastra Bank (NRB), lending rates range from 11.5 percent to 18 percent at present. During last year’s liquidity crunch, loans were hardly available at the rate below 15 percent. Similarly, interest rates on fixed deposits range from 8 percent to 14 percent, while the rates on saving deposits between from 4 percent to 10 percent.

“The rates are coming down, but the fall of lending rates has been much slower,” said NRB Deputy Governor Maha Prasad Adhikari.

The central bank has been urging bankers to maintain a competitive spread rate between the interest rates on deposits and credit by maintaining higher deposit rates and lowering lending rates.

However, bankers say they are not in a comfortable position to bring down lending rates as their cost of fund is still high due to the prevalence of deposits received at higher rates. “The main reason behind slow revision of lending rate is the prevalence of fixed deposits that were accepted at high interest rates last year,” said Kamal Gyawali, chief executive officer of KIST Bank. “We can expect a fall in interest rates in the third quarter, as the high-cost deposits will come down significantly until then.”

Given suppressed credit demand, banks are also not finding it necessary to lower rates immediately. “Good borrowers, however, are getting loans at far low interest rates than the usual rates,” said Gyawali.

Another reason for interest rates remaining higher, according to bankers, is the interest rate on treasury bills and inter-bank loans remaining below 1 percent.

When credit demand remains low, banks and financial institutions (BFIs) usually institutions invest in government securities and central bank instruments. But, the low interest rate has discouraged them to do so. They say that accepting high-cost deposits and investing at less than 1 percent is not a logical move.

The central bank has announced plans of maintaining ‘interest rate corroder’ to address this discrepancy between the market rates and rates of treasury bills and central bank instruments.

“If interest rates on treasury bills remain at a certain corridor, the interest rate stability will help banks plan accordingly for their interest rates,” said a senior NRB official. “It also influences inter-bank rates.”

However, with the credit demand rising lately, interest rates are expected to come down in the third quarter. “In the seventh month of the current fiscal year, BFIs’ lending growth rate has exceeded deposit growth rate,” said the NRB official.

As of the first six months of the current fiscal year, BFIs’ deposits grew by Rs 85.68 billion, while lending increased by 55.25 billion.

Source: Kantipur