Deposit rates up, as loan demand surges

Kathmandu, June 3

Deposit rates have once again started going up, as surge in demand for loans and deceleration in growth of deposits has compelled lenders to review the returns on money that individuals and firms park in banking institutions.

Commercial banks are offering interest rates as high as seven per cent per annum on deposits that institutions, such as Employees Provident Fund, insurance companies and other private units, park for a fixed period of one year.

Interest rate on one-year fixed deposit for individuals has also jumped to around 5.5 per cent to six per cent lately.

In April, weighted average deposit rate of commercial banks stood at 2.94 per cent, show the data of Nepal Rastra Bank.

Higher deposit rates benefit depositors, as they get more return on money parked in banks. But as these rates increase, banks also raise lending rates, adding burden on borrowers, who have obtained loans to buy cars, houses or for commercial purpose.

“One of the reasons for surge in deposit rate is higher demand for loans but slow growth in deposits,” Bhuvan Kumar Dahal, CEO of Sanima Bank, told The Himalayan Times.

Since the end of the blockade at Nepal-India border points in the first week of February, commercial banks have issued Rs 127 billion in loans, show the latest data of the Nepal Bankers’ Association.

In the same period, commercial banks received around Rs 67 billion in deposits. Because of this mismatch, the stock of loanable funds in the commercial banks has squeezed to around Rs 43 billion from around Rs 92 billion in mid-March.

“We were expecting deposits to grow with the hike in government spending but that has not happened yet,” Dahal said.

Prior to launching the budget for the next fiscal year on Saturday, the government’s treasury surplus stood at around Rs 209 billion. This means Rs 209 billion was sitting idle in government coffers at that time.

The government expects treasury surplus to stand at Rs 59.4 billion by the end of this fiscal year, which means Rs 149.6 billion of Rs 209 billion in excess funds would be spent within mid-July.

“But a huge chunk of that money still has not left the government coffers,” said Dahal.

Generally, government spending tends to reduce the stock of loans in 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 parties following release of government funds raise the stock of deposits in banking institutions.

However, when the pace of releasing funds locked up in government coffers will pick up is still not known, as treasury surplus still stands at around Rs 210 billion.