Spike in interbank lending rate trend signals liquidity crunch in coming days

ShareSansar, June 24:

Depositors can expect interest rates to go up as signaled by rising weighted average interbank lending rate among financial institutions brought on by tighter liquidity.

The rate has shot up to new heights over the last four months. It even reached 5.76 percent in May 2013 — in response to shrinking liquidity in the banking system. The average interbank lending rate among commercial banks that was at around 1 percent during the whole year of 2012 suddenly started to climb up with the starting month of 2013.

A higher interbank rate points out the acute need of cash for banks and financial institutions. Interbank lending is considered the best short-term liquidity management tool as the needy ones can borrow and the ones with surplus cash can earn an interest.

The amount borrowed and lent within commercial banks has more than doubled in the ninth months of the current fiscal year in comparison to the corresponding period of the previous fiscal. Three years back, during the acute liquidity crunch, interbank lending in the Nepali financial market had reached as high as 12 per cent. Then the saving deposit rates were as high as 6 per cent on average and fixed deposits paid about 8 percent to depositors.

Interbank lending rates are one of the guiding factors for interest rates.

The minimal interest rate for deposits being offered by banks has deterred depositors from keeping money in banks. As growth in deposits has contracted of late while lending has become expensive, more banks are seeking interbank lending to meet short-term fund mismatch.

The tight liquidity situation that has started to compromise the ability of the banks to lend for projects is compelling them to revise the interest rate.

Due to liquidity crunch, banks will increase interest rate both on the deposit and Loan. Though the depositors will benefit from higher interest rate on their deposit, overall economy will be affected by the rising interest rate on loan. The increasing loan rate will make doing business though. Share market will also be adversely affected since investors go for bank deposits since they get a good return in bank without taking any risk.

Bankers also admit that banks are facing liquidity pressure. The banking system was facing liquidity crunch due to government’s failure in the spending development budget. The government currently holds around Rs 21 billion in its treasury.

Deposit mobilization of banks and financial institutions increased by 18.81 per cent to Rs 930.87 billion in the ninth months, according to commercial banks 3rd quarter report. However, credit increased by 25.58 per cent to Rs.718.24 billion in the review period.