Kathmandu, October 3

Borrowers of the banks and financial institutions (BFIs) may have to pay high interest rate for credit in coming months as the liquidity situation has tightened since few months due to slowdown in remittance inflow, low capital expenditure of the government and increased attraction towards stock market. Sluggish growth of deposit against credit extended by the BFIs is raising pressure on the BFIs to increase interest rate in deposits.

BFIs are already offering eight per cent interest rate to institutional depositors. Very recently, banks have quoted eight per cent interest rate in call of deposit from the Citizen Investment Trust (CIT).

The interest rate in deposit has increased as BFIs started facing liquidity crunch. In the last month, weighted average deposit rate hovered around 3.29 per cent. BFIs have not jacked up the lending rates till the date. Weighted average lending rate of the commercial banks remains at around 8.88 per cent, according to Nepal Rastra Bank (NRB).

Deposit collection has slowed down against credit expansion. Between the period of mid-August to September-end, lending of commercial banks expanded by Rs 60 billion against the deposit collection of Rs 53 billion.

“Tight liquidity situation has pressurised the BFIs to increase the lending rate,” said Bhuvan Kumar Dahal, CEO of Sanima Bank.

BFIs are now watching closely how quickly the government will release the aid to the earthquake-affected households. If the government releases the second instalment of the aid in the near future, BFIs will not face much pressure in raising the deposit rate because the lending rates are normally dependent on the rate of deposit. But the procedural delays could result in distribution of second instalment to be stalled by months as National Reconstruction Authority (NRA) is yet to decide on how much money will be released as second instalment after the grant amount to quake survivors has been raised to Rs 300,000 from Rs 200,000 of earlier.

Interbank rate has also started going up as liquidity situation has tightened. Interbank rate of the commercial banks currently stands at three per cent, which had remained at around one per cent since last few years.

The country had witnessed similar situation back in fiscal year 2009-10 after the remittance recorded negative growth following the global financial crisis.

NRB has already injected Rs 10 billion as repo with maturity of seven days to the BFIs to ease the liquidity situation. It seems the BFIs are under more pressure for liquid funds.

According to NRB, BFIs have submitted bid amount of Rs 14.61 billion on October 2, as compared to Rs 8.12 billion on September 29. NRB had issued repo worth Rs five billion each time. However the weighted average rate has slightly come down from 3.17 per cent on September 29 to 2.95 per cent on October 2.

Commercial banks need to maintain 12 per cent of their total deposit as liquid cash. Likewise, such rate for the development banks and the finance companies has been set at nine per cent and eight per cent, respectively.