Throughout the month of February, financial institutions were lending
money to each other at more than six per cent interest. Then in March,
the interbank lending rate started to slow down. But by mid-April it had
already hit the six per cent mark. However, as of late September, the
interbank rate is hovering around 0.2 per cent.Banks that had to obtain funds from Nepal Rastra Bank (NRB)’s Standing Liquidity Facility at eight per cent bank rate in July are now scrambling to lend money to the central bank at a rate as less as 0.036 per cent.
Such massive fluctuation in rates is brought on by the ups and downs in liquidity or loanable funds with banks. However, such constant oscillation of liquidity in the financial system is a signal that all is not well in the economy. “Such short-term fluctuation is a mere symptom that the economy is not moving in the right direction,” according to senior economist Prof Dr Madan Kumar Dahal.
Lower interbank rate points out the surplus of cash for banks and financial institutions and vice versa. These rates are one of the guiding factors for the general interest rates.
“The current liquidity surplus is the result of low credit growth rather than due to increased volume of deposits,” said Dr Dahal. In the last 10 months, lending has grown by 10 per cent while deposits have increased by 14 per cent, and commercial banks alone have liquid funds worth Rs 59 billion at present.
At present, there is enough supply of funds available for banks but the demand for credit is low, thus despite nominal growth in deposits, low lending has swelled up loanable funds at financial institutions. “The lack of credit demand is a glaring signal that the economy is not moving in the right direction. Moreover, interest rate volatility has further scared borrowers,” said Dr Dahal.
According to NRB’s banking statistics, weighted average lending rate when money at banks was a bit tight stood at 12.76 per cent in mid-April, while by mid-March such weighted average had come down to 12.10 per cent. The weighted average of lending rate was at 12.89 per cent back in mid-January. For businesses and the private sector, such constant fluctuations create difficulty in planning the cost of production.
“Lower interest rates alone cannot cure the problem of current credit demand crunch. A supportive fiscal policy and stable political environment to support businesses is missing,” informed Dr Dahal.
This time, after mid-April, the government went on a spending spree as the last installment of the budget released the remaining portion of capital expenditure. Between mid-May and mid-July, deposits at commercial banks grew by Rs 73 billion due to scaled up government expenditure. However, during the period, lending increased by only Rs 23 billion because banks refrain from floating loans at the end of a fiscal year.
“The fluctuating liquidity is not helping anyone, be it financial institutions, depositors, borrowers or the economy as a whole, as it creates uncertainty,” said CEO of NIC Asia Bank Sashin Joshi. “NRB conducting reverse repo and outright purchase auction is not enough to absorb liquidity from market. It should introduce an interest rate corridor to create a band to prevent rates from going to extreme lows or high levels.”
Development banks and finance companies are disposing excess funds by depositing it in call accounts at commercial banks. Call accounts offer interests of up to five per cent which is better than rates offered by government securities.
source: the himalyan times,25 sep 2013
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