Kathmandu, June 19

On Sunday, NMB Bank circulated an e-mail titled ‘Fixed Deposit Offers’, proposing annual interest of six per cent on 75-day fixed deposit.

The move made by the bank, which was offering an interest of four per cent on same product until some time ago, signals the urgency with which it is trying to expand its deposit base.

“We raised the rate to ensure the deposit is in a comfortable position,” NMB Bank CEO Upendra Poudyal said.

Like NMB, many other commercial banks have also been raising interest rates in the recent days. This trend started in May and is still continuing.

One-year fixed deposit parked by individuals at banks now generate a return of around six per cent per annum, while few banks are offering annual interest of as high as 6.25 per cent on 90-day fixed deposit. On the other hand, deposits parked by institutions, such as Employees Provident Fund and insurance companies, now yield an annual interest of up to 7.25 per cent.

Around one-and-a-half months ago, these one-year deposit products used to generate a return of around five per cent.

Higher deposit rates benefit depositors, who get more return on money parked at banks. But the bad news is that the rate hike is unlikely to sustain for a longer term because it was a result of temporary tightness in deposit felt by banks.

“Deposit rates are going up lately because remittance growth rate has decelerated, while government spending has not gone up,” Laxmi Bank CEO Sudesh Khaling told The Himalayan Times.

Remittance growth rate decelerated to 10.2 per cent in May from as high as 27.5 per cent in September. Also, the government, as of Friday (or after 11 months into this fiscal year), was only able to spend 51.9 per cent of the annual budget of Rs 819.5 billion.

As a result, the government’s treasury surplus currently stands at around Rs 216.5 billion. While remittance growth rate has slowed and public spending has not picked up, demand for loans has been going up.

Since the blockade on Nepal-India border points ended in the first week of February, lending has expanded by around Rs 143 billion, show the latest data of the Nepal Bankers’ Association. In the same period, deposits grew by around Rs 77 billion.

Because of this mismatch in deposit and credit growth, the stock of loanable funds at  commercial banks — after deducting funds that need to be set aside to maintain liquidity-deposit ratio of 20 per cent — has now squeezed to around Rs 37 billion from around Rs 92 billion in mid-March.

“We hope the correction will soon take place as public spending generally rises in the last month of the fiscal year,” said Khaling.

Generally, government spending tends to reduce the stock of loans at banking institutions because contractors, who have borrowed money to execute various projects, accelerate the pace of repaying the debt. Likewise, payments made by contractors to various parties following release of government funds raise the stock of deposit at banking institutions.