KATHMANDU, NEPAL
Interest rates on institutional deposits are continuing to go up as liquidity shortage triggered by government´s lower capital spending has compelled some commercial banks to quote higher prices to maintain regulatory credit to deposit ratio.
However, some bankers say this is a short term phenomenon and rates will come down once the new financial year begins. As per information obtained by Republica, commercial banks are currently offering over 11 percent interest on institutional deposits -- money parked by companies in banks -- from around 9.5 percent one and half months ago.
Some of the banks that are offering higher interest rates include established institutions like Nepal Investment, Himalayan and Bank of Kathmandu.
One of the reasons why few commercial banks are paying more on deposits is the central bank´s provision that makes it mandatory to maintain a credit to core-capital-cum-deposit (CCD) ratio of 80 percent.
Since this provision bars banks from extending loan of more than Rs 80 from every Rs 100 collected as deposits, some of them are now trying to attract as much deposit to maintain the ratio.
In the third quarter ended April 13, average CCD ratio of commercial banks stood at two-year high of 75 percent.
The last time when CCD ratio had hovered at this level was in the third quarter of financial year 2010/11. Since then quarterly CCD ratio has moved in a band of 68 percent to 74 percent.
“Yes, many commercial banks are maintaining tight CCD ratio. This is because of liquidity shortage,” Ajay Shrestha, CEO of Bank of Kathmandu, told Republica. Krishna Prasad Sharma, CEO of state-owned Rastriya Banijya Bank (RBB), also held the same view.
A look into unaudited third-quarter financial results of commercial banks shows that at least 10 commercial banks are maintaining CCD ratio of over 78 percent, with CCD ratio of Nepal SBI Bank and Mega Bank standing at 79.89 percent and 79.34 percent, respectively. The CCD ratio of state-run Agricultural Development Bank has even crossed the regulatory limit and spiked to 81.33 percent.
Such a situation means these banks either have to completely stop extending loans or lure more deposits to be able to provide credit to customers.
“We are facing this situation because of lower capital spending of the government (expenditure made on development activities like infrastructure building),” Shrestha said. “This, in turn, was the result of failure to introduce full budget on time.”
He held the view that whenever the government fails to introduce budget on time the country faces liquidity shortage.
“For instance, during fiscal year 2010/11, when budget announcement was delayed the country faced liquidity crisis. A year later, when the full budget was introduced on time, the banking sector witnessed liquidity surplus. Now, many banks are reeling under liquidity stress because of failure to introduce a full budget on time,” Shrestha said.
The government failed to introduce a full budget this fiscal year due to differences between political parties during the rule of Babu Ram Bhattarai-led government. Although a full budget was introduced on April 9 following collapse of the Bhattarai-led government, it was already too late.
This, on one hand, hampered capital spending of the government -- the largest spender in the country -- while, on the other hand, flooded government´s coffers with cash due to surge in revenue collection.
The government´s treasury currently holds cash of over Rs 50 billion, while capital spending in the first 10 ten months of the current fiscal year stood at around Rs 22.49 billion -- around 34 percent of the total budget of Rs 66.1 billion allocated for capital expenditure this fiscal year.
Since the Ministry of Finance is not expecting surge in capital spending in the remaining one and half months of this fiscal year, it is almost certain money allocated by the government for development activities will not be fully utilized.
Many say lower capital spending coupled with piling of more cash in the government´s treasury at the end of the fiscal year -- due to payment of last installment of income taxes by companies -- will be a double whammy for banks.
“But we are hopeful of the government launching full budget on time for the next fiscal year. So situation will change within one and half months, as at around that time remittances for Dashain festival will gradually start to enter the country,” Shrestha said.
RBB´s Sharma is also hopeful of fall in institutional deposit rates as “there is not much demand for loans at the moment”.
Source: myrepublica, 29th May 2013
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Interest rates on institutional deposits are continuing to go up as liquidity shortage triggered by government´s lower capital spending has compelled some commercial banks to quote higher prices to maintain regulatory credit to deposit ratio.
However, some bankers say this is a short term phenomenon and rates will come down once the new financial year begins. As per information obtained by Republica, commercial banks are currently offering over 11 percent interest on institutional deposits -- money parked by companies in banks -- from around 9.5 percent one and half months ago.
Some of the banks that are offering higher interest rates include established institutions like Nepal Investment, Himalayan and Bank of Kathmandu.
One of the reasons why few commercial banks are paying more on deposits is the central bank´s provision that makes it mandatory to maintain a credit to core-capital-cum-deposit (CCD) ratio of 80 percent.
Since this provision bars banks from extending loan of more than Rs 80 from every Rs 100 collected as deposits, some of them are now trying to attract as much deposit to maintain the ratio.
In the third quarter ended April 13, average CCD ratio of commercial banks stood at two-year high of 75 percent.
The last time when CCD ratio had hovered at this level was in the third quarter of financial year 2010/11. Since then quarterly CCD ratio has moved in a band of 68 percent to 74 percent.
“Yes, many commercial banks are maintaining tight CCD ratio. This is because of liquidity shortage,” Ajay Shrestha, CEO of Bank of Kathmandu, told Republica. Krishna Prasad Sharma, CEO of state-owned Rastriya Banijya Bank (RBB), also held the same view.
A look into unaudited third-quarter financial results of commercial banks shows that at least 10 commercial banks are maintaining CCD ratio of over 78 percent, with CCD ratio of Nepal SBI Bank and Mega Bank standing at 79.89 percent and 79.34 percent, respectively. The CCD ratio of state-run Agricultural Development Bank has even crossed the regulatory limit and spiked to 81.33 percent.
Such a situation means these banks either have to completely stop extending loans or lure more deposits to be able to provide credit to customers.
“We are facing this situation because of lower capital spending of the government (expenditure made on development activities like infrastructure building),” Shrestha said. “This, in turn, was the result of failure to introduce full budget on time.”
He held the view that whenever the government fails to introduce budget on time the country faces liquidity shortage.
“For instance, during fiscal year 2010/11, when budget announcement was delayed the country faced liquidity crisis. A year later, when the full budget was introduced on time, the banking sector witnessed liquidity surplus. Now, many banks are reeling under liquidity stress because of failure to introduce a full budget on time,” Shrestha said.
The government failed to introduce a full budget this fiscal year due to differences between political parties during the rule of Babu Ram Bhattarai-led government. Although a full budget was introduced on April 9 following collapse of the Bhattarai-led government, it was already too late.
This, on one hand, hampered capital spending of the government -- the largest spender in the country -- while, on the other hand, flooded government´s coffers with cash due to surge in revenue collection.
The government´s treasury currently holds cash of over Rs 50 billion, while capital spending in the first 10 ten months of the current fiscal year stood at around Rs 22.49 billion -- around 34 percent of the total budget of Rs 66.1 billion allocated for capital expenditure this fiscal year.
Since the Ministry of Finance is not expecting surge in capital spending in the remaining one and half months of this fiscal year, it is almost certain money allocated by the government for development activities will not be fully utilized.
Many say lower capital spending coupled with piling of more cash in the government´s treasury at the end of the fiscal year -- due to payment of last installment of income taxes by companies -- will be a double whammy for banks.
“But we are hopeful of the government launching full budget on time for the next fiscal year. So situation will change within one and half months, as at around that time remittances for Dashain festival will gradually start to enter the country,” Shrestha said.
RBB´s Sharma is also hopeful of fall in institutional deposit rates as “there is not much demand for loans at the moment”.
Source: myrepublica, 29th May 2013
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