| May 19, 2019
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Banks up interest rate on deposits to meet loan demand

KATHMANDU, June 7: With loan demand picking up, bank and financial institutions (BFIs) have started increasing interest rate on deposit.

The immediate reflection of tighter liquidity position of BFIs is evident in interest rates on fixed deposit of institutional depositors, according to bankers.
While institutional depositors used to get interest rate in a range of 4 to 5 percent on their deposit for a fixed period until mid-April, banks are now offering 6-7 percent interest rates.

Bankers say that the government's delay to increase its development expenditure has led to rise in interest rates offered by BFIs who are required to maintain certain threshold of credit deposit (CD) ratio.

CD ratio refers to the ratio of how much a bank can lend out of the deposits that it has mobilized. The central bank has set the CD ratio of 80:20 for a commercial bank, which means that a bank can lend only Rs 80 if it collects a deposit of Rs 100.

"There were expectations that the government would boost capital spending at the end of the current fiscal year. This would have increased cash flow into the banking system leading to rise in deposits," Bhuwan Dahal, CEO of Sanima Bank Ltd, said. "However, there has not been much increase in capital spending in recent times. It has put banks in tighter liquidity position."

He also told Republica that loans have been picking up in recent days after a long slowdown in lending due to the devastating earthquakes of 2015, and Tarai turmoil and ensuing economic blockade imposed by India.

According to Nepal Bankers Association, total credit of 29 commercial banks jumped by Rs 36 billion to Rs 1,311 billion since the end of second quarter i.e. mid-April. However, deposit mobilization in the same period grew by only Rs 12 billion to Rs 1,645 billion.

"While loans have been going up in recent days, deposit mobilization has not. The increase in the capital expenditure would have increased deposits. But as banks are required to maintain CD ratio as well as float loans when there is demand, they have been raising rates lately," added banker Dahal.

Another banker, Ashok Sherchan, agreed with Dahal. "With the end of fiscal year approaching closer, banks are feeling pressure to maintain their CD ratio. This has led banks to offer higher interest rates on fixed deposits. This means banks which manage to get more deposit and maintain the required CD ratio will be able to float more loans if there is demand," said Sherchan, CEO of Prabhu Bank Ltd, said.

Commercial banks had an average CD ratio of 75.2: 24.8 at the end of the third quarter while such ratio now hovers around 78:22.
Sagar Ghimire

Ghimire is associated with Republica, English National Daily, since November 2013. He reports and writes on banking, financial, cooperatives, labor and foreign employment issues.

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