Kathmandu, June 21

Due to unhealthy competition among banks to woo deposits by offering high interest rates on deposits after the removal of the ‘agreed’ interest rate ceiling on June 10, the Nepal Bankers’ Association — the umbrella body of class ‘A’ financial institutions — has again fixed the ceiling on interest rate in deposit schemes.

According to Gyanendra Prasad Dhungana, president of NBA, commercial banks agreed to keep the interest rate on fixed deposits below 11 per cent and that on saving deposits below seven per cent. Interest rates on deposits had sky-rocketed after NBA removed the ceiling a fortnight ago. Bankers agreed to keep the interest rates at the aforementioned threshold after the Ministry of Finance asked government-owned institutions, such as Citizen Investment Trust, Employees Provident Fund and Insurance Board, to look into the sustainability of interest rates. The MoF has expressed anxiety over the unsustainably growing bank interest rates irrespective of the inflation. Average inflation in the first 10 months of this fiscal was 4.1 per cent.

Around this time in the previous fiscal years, deposit rates used to take a dip due to higher development expenses of the government. However, government expenses have yet to gather pace this fiscal as only around 50 per cent of the capital budget has been spent in the 11 months of this fiscal, according to the Financial Comptroller General’s Office.

As per bankers, credit demand is high this year, but the sources for deposit collection are limited.

Ashoke Shumsher Rana, CEO of Himalayan Bank, said banks were under pressure to lift the agreed ‘ceiling on interest rate’ as institutional depositors started bargaining with the banks where they deposit their funds.

Due to under-utilisation of the capital budget, weak remittance growth and sluggish exports, deposit growth has been sluggish throughout the year. Against this backdrop, if banks start competing on deposit rates, that will invite risk in the financial market.

Nepal Rastra Bank has also asked NBA to maintain ‘discipline’ while competing on deposit rates, citing risky behaviour of some financial institutions, according to bankers.

“Interest rate on lending is also expected to stabilise as banks won’t breach the interest rate ceiling they have agreed upon,” stated Rana.

The lending rate has remained high throughout the fiscal and there is no sign of it coming down. Bhuvan Kumar Dahal, CEO of Sanima Bank, said loan demand was still high and banks were disbursing even the already committed loans gradually in various tranches based on the increase in deposits.

According to NBA, till the 11th month of this fiscal, the total deposits collected by the banks stood at Rs 256 billion, whereas banks had floated loans worth Rs 342 billion.

Banks can issue loans of up to 80 per cent of the sum of deposit and core capital. Deposit of the banks stood at Rs 2,256 billion, while total loan portfolio of the banks stood at Rs 2,063 billion. The growth of deposits stood at 11.3 per cent, whereas loans grew at 16.5 per cent in the review period.

READ ALSO:

• Will decision to regulate deposit rates bring down credit rates?