Interest on deposits less than inflation rate

KATHMANDU, SEP 28: 

General depositors are actually losing out by keeping their money in the banks at the current deposit interest rate which is way lower than inflation.

The average fixed deposit rate of all commercial banks stands at 6.5 per cent at present, and interest for savings deposit ranges from 3.7 per cent to 5.7 per cent.

According to Nepal Rastra Bank (NRB)’s data, average inflation in the last fiscal year stood at 8.3 per cent. 

In the last month of fiscal year 2011-12, the price rise shot to 11.5 per cent –– highest in last three years.

“A deposit rate that is below inflation not only hurts depositors financially, but is also a disincentive to save,” pointed out senior economist Dr Biswambher Pyakurel, adding that in Nepal, interest rate management is not in sync with the amount of liquidity, due to policy uncertainty.

The deposit rate in the last couple of years had crept up to 11 per cent for savings and 13 per cent for fixed as the Nepali financial sector went through a severe liquidity crunch.

In the last one year, increased remittance to the country and timely budget have flushed the banks with money.

Banks have cut down on deposit interest rates but the average lending rate remains between 11 per cent to 15.5 per cent, as their cost of fund has not gone down.

“Banks are also uncertain about taking drastic steps regarding interest rates, because there is no policy assurance from Nepal Rastra Bank, which keeps changing policies frequently keeping the banking sector fluid,” the senior economist added.

Even if the monetary measures along with implementation of effective market regulation are successful in keeping the inflation level at the targeted 7.5 per cent, then too savers who keep their money in fixed deposits in the beginning of this fiscal year will get a negative real interest. 

At 6.5 per cent fixed deposit rate, Rs 100,000 in a fixed deposit account will gain Rs 6,500 as interest, but with inflation at 7.5 per cent the saving will lose value worth Rs 7,500. 

Thus, in the end higher inflation will lead to depositors losing more real value than gaining. In addition, people who deposit money in the banks will also have to pay 10 per cent tax on their interest income, explained Pyakurel.

Moreover, the recent forecast of International Monetary Fund (IMF), inflation this fiscal will range between eight per cent to nine per cent. 

“It is time for the central bank, banks and investors 

to have tri-partite communication to decide on a course to be taken so that some sort of certainty can be maintained in the financial system that will also stimulate demand for funds from the private sector at a competitive interest rate and depositors will also get good interest rates without any distortion in the monetary system,” said Dr Pyakurel. 

Similarly, Nepal Rastra Bank will also introduce a base rate concept that will ensure the minimum lending rate giving some direction to the interest movement. 

Likewise, Nepal Rastra Bank is also mulling an interest rate corridor to cure the interest rate volatility to some extent.

Source: THT