Inter-bank lending rate surges to alarming six per cent

Kathmandu, January 14

Inter-bank lending rate has shot up to around two-year high of six per cent, as banks scrambled to borrow money from other institutions to shore up their balance sheets following huge withdrawal of funds by corporate clients to meet the income tax payment deadline.

Banks have seen withdrawal of an estimated Rs 60 billion in the last few days, as corporate clients rushed to deposit first income tax instalment in state coffers to meet the deadline today. Income tax equivalent to 40 per cent of the annual estimate must be deposited at tax offices by the end of the first half of the fiscal.

This transfer of funds has reduced the deposit stock of banks, exerting pressure on credit to core-capital-cum-deposit (CCD) ratio. Banks and financial institutions must maintain CCD ratio of 80 per cent, meaning for every Rs 100 of core capital and deposit, loan disbursement should not exceed Rs 80. The CCD ratio gives a picture of lending capacity of banks and those that do not meet the regulatory requirement face action.

The CCD ratio of banks hovered around 77.4 per cent as of January 4, THT analysis of Nepal Bankers’ Association’s data shows.  “With huge withdrawal of funds and very slow deposit growth, CCD ratio of banks must have shrunk further, putting many in a precarious position,” said Himalayan Bank CEO Ashoke Rana.

This tightening of CCD ratio has raised demand for inter-bank loans. Yesterday, commercial banks recorded inter-bank transaction of Rs 9.5 billion with average lending rate standing at 5.4 per cent. Although complete data of today’s inter-bank transaction are not available, the rate soared to around six per cent at around 2:00pm. Until a week ago, inter-bank lending rate had remained below four per cent.

One of the banks that is vigorously using the inter-bank window to borrow money is NIC Asia. Yesterday, it used the facility eight times to borrow Rs 3.7 billion at rates ranging from 5.1 per cent to 5.9 per cent, show data with THT.

Inter-bank lending is a short-term instrument that banks use to borrow money from another institution. The loan must be repaid in seven days, unless it is rolled over. Generally, inter-bank loans are used to replenish the cash reserve ratio -- the portion of deposit that banks must park at the central bank.

But recently the central bank allowed banks and financial institutions to factor in credit obtained through inter-bank window as deposit to meet the CCD requirement. However, banks that tap the inter-bank window to meet the CCD requirement must make full disclosure and lenders must enrol such credit under ‘loans and advances’ category, meaning such credit will be treated no different than loans provided to, say, buy a car or open a business.

But lately some banks may have been obtaining inter-bank loans on the pretext of replenishing cash reserve ratio and using them to meet the CCD requirement, according to bankers. This practice can invite problems in the banking sector because it transforms short-term deposit into longer-term loans.

Central bank spokesperson Narayan Prasad Paudel could not be contacted.