Lesson from liquidity crunch: Banks start diversifying deposit portfolio
KATHMANDU, OCT 16 -
It seems banks have learnt a valuable lesson from last fiscal year’s liquidity crunch. They are now diversifying their deposit portfolio, introducing long term deposit schemes and also focusing more on individual deposits.
Amid asset-liability mismatch due to long-term lending from short-term funds, banks have started to introduce long-term deposit products. As major infrastructure projects like hydropower require long-term investment, banking institutions, of late, have realised the need for long-term liquidity.
Given most of the fixed deposits in banks have maturity period of less than two years, NIC Bank recently launched a deposit product with a maturity period of 77 months— which it says will use for investing especially in industrial projects. The scheme offers an interest rate of 15.58 percent and deposits will double after maturity. According to the bank, the scheme will be valid for a limited period until the bank’s set target is met. The minimum deposit amount for the scheme has been fixed at Rs 50,000.
“We introduced this scheme in order to diversify our products, balance the mismatch of long-term financing and short-term deposits and increase depositor base without depending on institutional investors,” said NIC CEO Sashin Joshi, adding that given the high interest rate offered in the scheme, lending rate would not go up. “We will adjust the interest rate in the entire interest rate structure of the bank,” said Joshi.
Nepali banks are more dependent on short- and medium-term deposits. Institutional depositors are the main source for fixed deposits whose maximum maturity period is two years. However, heavy reliance on institutional depositors has its drawbacks. This was evident last year when some financial institutions faced acute liquidity shortage after some institutional investors withdrew their deposits. “We introduced this scheme also to reduce dependence on institutional depositors,” said Joshi.
However, the banking community expresses doubt over whether long-term deposit schemes are feasible at a time when public confidence in banks is eroding and average lending rate is still high. “Introducing long-term deposit schemes may not be practical at the moment as it will be difficult to lend by accepting deposits at 14-15 percent,” said Nepal Bankers’ Association President Ashoke Rana.
Bankers say they are watching NIC’s effort and its success may encourage other banks to take such initiatives. Nabil Bank’s Chief Financial Controller Amrit Charan Shrestha said there was a need for an experiment of long-term deposit schemes and that NIC has done a good job. Shrestha, however, expressed doubt about the success of such products given the volatility of interest rate and crisis of public confidence in banks and financial institutions. He said his bank has no such plans immediately.
Central bank officials say banks will have to take the possible risk into consideration while launching such schemes. “It may not help banks in the absence of a particular project seeking long-term funds,” said Bhasarmani Gnawali, spokesperson for Nepal Rastra Bank.
Although commercial banks mobilise short- and medium-term deposits, Gnawali said the central bank has not discouraged long-term deposit mobilisation as long as they ensure good portfolio management. Given the absence of long-term lending institutions for hydropower, the government has recently established Hydropower Development Company.
Source: Kantipur
It seems banks have learnt a valuable lesson from last fiscal year’s liquidity crunch. They are now diversifying their deposit portfolio, introducing long term deposit schemes and also focusing more on individual deposits.
Amid asset-liability mismatch due to long-term lending from short-term funds, banks have started to introduce long-term deposit products. As major infrastructure projects like hydropower require long-term investment, banking institutions, of late, have realised the need for long-term liquidity.
Given most of the fixed deposits in banks have maturity period of less than two years, NIC Bank recently launched a deposit product with a maturity period of 77 months— which it says will use for investing especially in industrial projects. The scheme offers an interest rate of 15.58 percent and deposits will double after maturity. According to the bank, the scheme will be valid for a limited period until the bank’s set target is met. The minimum deposit amount for the scheme has been fixed at Rs 50,000.
“We introduced this scheme in order to diversify our products, balance the mismatch of long-term financing and short-term deposits and increase depositor base without depending on institutional investors,” said NIC CEO Sashin Joshi, adding that given the high interest rate offered in the scheme, lending rate would not go up. “We will adjust the interest rate in the entire interest rate structure of the bank,” said Joshi.
Nepali banks are more dependent on short- and medium-term deposits. Institutional depositors are the main source for fixed deposits whose maximum maturity period is two years. However, heavy reliance on institutional depositors has its drawbacks. This was evident last year when some financial institutions faced acute liquidity shortage after some institutional investors withdrew their deposits. “We introduced this scheme also to reduce dependence on institutional depositors,” said Joshi.
However, the banking community expresses doubt over whether long-term deposit schemes are feasible at a time when public confidence in banks is eroding and average lending rate is still high. “Introducing long-term deposit schemes may not be practical at the moment as it will be difficult to lend by accepting deposits at 14-15 percent,” said Nepal Bankers’ Association President Ashoke Rana.
Bankers say they are watching NIC’s effort and its success may encourage other banks to take such initiatives. Nabil Bank’s Chief Financial Controller Amrit Charan Shrestha said there was a need for an experiment of long-term deposit schemes and that NIC has done a good job. Shrestha, however, expressed doubt about the success of such products given the volatility of interest rate and crisis of public confidence in banks and financial institutions. He said his bank has no such plans immediately.
Central bank officials say banks will have to take the possible risk into consideration while launching such schemes. “It may not help banks in the absence of a particular project seeking long-term funds,” said Bhasarmani Gnawali, spokesperson for Nepal Rastra Bank.
Although commercial banks mobilise short- and medium-term deposits, Gnawali said the central bank has not discouraged long-term deposit mobilisation as long as they ensure good portfolio management. Given the absence of long-term lending institutions for hydropower, the government has recently established Hydropower Development Company.
Source: Kantipur
