Nepal | July 11, 2020

Banks mull slashing interest rate on deposits from new fiscal year

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Banks are preparing to reduce the interest rate on deposits citing that the low interest rate on loans and higher rates on deposit are adding to the financial pressure on banks and financial institutions (BFIs).

Though banks have not been reducing interest rate on deposits despite the pressure to bring down interest rate on loans due to COVID-19 in line with the request from Nepal Rastra Bank (NRB) and the government, they have said banks are not in a position to give high interest rate on deposits.

A banker seeking anonymity said an informal understanding had been reached among banks to reduce the interest rate on deposits from the beginning of the new fiscal year. A few banks, including NIC Asia Bank, have already reduced the interest rate on deposits by half (0.5) percentage point.

As of today, banks have been giving up to seven per cent interest on institutional deposits while individual depositors are getting up to 8.75 per cent.

“While business (loan disbursement) is low, deposit is increasing among banks. Thus, it is high time that banks adopt austerity measures to keep operational cost under control and one of the measures is by reducing the interest rate on deposits,” said Bhuvan Dahal, chief executive officer of Sanima Bank and also president of Nepal Bankers’ Association (NBA) — the umbrella organisation representing the 27 commercial banks in Nepal.

As per available statistics, loan disbursement from banks till mid-June has come down by almost Rs 29 billion compared to last year, while deposits has increased by Rs 87 billion.

Though loan disbursement from banks was higher than deposits in the last three years, the trend has turned opposite this fiscal year due to the COVID-19 and subsequent lockdown.

As a result of rising deposits and falling loan disbursement, the credit to capital plus deposit ratio (CCD) of banks has come down to almost 74 per cent today. The CCD ratio is the limit till which the banks are allowed to issue loans and advances.

While the highest CCD among banks today is 77 per cent, the lowest stands at 65 per cent. As per regulatory provision, banks need to maintain CCD ratio below 80 per cent.

Earlier, banks had prepared to reduce interest rate on deposits after the central bank ordered banks to bring down interest rate on loans by two percentage points. However, banks deferred their plan to slash interest on deposits on suggestion from NRB Governor Maha Prasad Adhikari.

A version of this article appears in e-paper on June 30, 2020, of The Himalayan Times.

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