Banks have slashed their fixed deposit rates amidst the rising difficulty in disposing excess funds. The 31 commercial banks are offering 6.2 per cent interest on average for fixed deposits of one year, according to their revised interest rate from December 16.
They were paying 7.4 per cent interest for one-year fixed deposits on September 1. In the four months, their battle with excess liquidity has hammered the deposit rates down. Along with fixed deposit rates, savings rates have also been down.
“Since the banks have surplus funds that are not being lent to any projects, there is less need for accumulating deposits in excess, hence deposit rates have come down,” pointed out vice president of Nepal Bankers’ Association (NBA) Upendra Poudyal.
Commercial banks seem to be sitting on idle cash worth Rs 70 billion, as of the first week of December. Since the very beginning of the fiscal year, banks have been facing a difficult time disposing of their excess funds due to the absence of credit demand from the market.
“Since the growth of deposits is faster than that of credit, bringing the deposit rates down is the prudent decision at present,” pointed out Poudyal who is also CEO of NMB Bank.
Of the total deposits at the commercial banks, 22 per cent consists of fixed deposits worth Rs 354 billion as of mid-November.
The overall deposit rate has come down to 4.86 per cent as of mid-November, according to Nepal Rastra Bank’s data, which stood at 5.13 per cent as of early September. Along with deposit rates, the average lending rate has also reached 11.79 per cent by mid-November from 12.10 per cent in early September.
Moreover, at present, when inflation rate is near 10 per cent, the decline in fixed deposit rate is eroding the value of depositors’ money. Even if the monetary measures along with implementation of effective market regulation are successful in keeping inflation level at the targeted eight per cent, then too savers will get negative real interest.
At 6.2 per cent fixed deposit rate, Rs 100,000 in a fixed deposit account will gain Rs 6,200 as interest, but with inflation at eight per cent the saving will lose value worth Rs 8,000. In addition, depositors have to pay 10 per cent tax on their interest income.
“Since deposit rates have come down substantially there is a chance that deposits might shift to cooperatives and similar semi-formal financial institutions,” expressed Poudyal.
Almost three years ago, when financial institutions were undergoing acute liquidity crunch, the rates had crept up to 11 per cent for savings and 13 per cent for fixed. However, now the banks are flooded with deposits but demand for credit is too low to absorb the excess funds.
At the same time, interbank lending rates and the rate for government securities have also reached near-zero per cent so the alternate interest yields of the banks have become nominal. The first defence of banks against increasing cost has always been lowering the interest being paid to depositors when liquidity is on the higher side.
“To prevent any adverse impact on financial stability NRB is using its Open Market Operations to absorb surplus funds at the banks,” pointed out NRB spokesperson Bhaskar Mani Gyanwali. The central bank has already undertaken reverse repo worth Rs 64.5 billion since September for the very purpose.
“Moreover, the rates are determined by demand and supply forces in the market than anything else,” he pointed out.
source:the himalayan times,17 Dec 2013
LINK
They were paying 7.4 per cent interest for one-year fixed deposits on September 1. In the four months, their battle with excess liquidity has hammered the deposit rates down. Along with fixed deposit rates, savings rates have also been down.
“Since the banks have surplus funds that are not being lent to any projects, there is less need for accumulating deposits in excess, hence deposit rates have come down,” pointed out vice president of Nepal Bankers’ Association (NBA) Upendra Poudyal.
Commercial banks seem to be sitting on idle cash worth Rs 70 billion, as of the first week of December. Since the very beginning of the fiscal year, banks have been facing a difficult time disposing of their excess funds due to the absence of credit demand from the market.
“Since the growth of deposits is faster than that of credit, bringing the deposit rates down is the prudent decision at present,” pointed out Poudyal who is also CEO of NMB Bank.
Of the total deposits at the commercial banks, 22 per cent consists of fixed deposits worth Rs 354 billion as of mid-November.
The overall deposit rate has come down to 4.86 per cent as of mid-November, according to Nepal Rastra Bank’s data, which stood at 5.13 per cent as of early September. Along with deposit rates, the average lending rate has also reached 11.79 per cent by mid-November from 12.10 per cent in early September.
Moreover, at present, when inflation rate is near 10 per cent, the decline in fixed deposit rate is eroding the value of depositors’ money. Even if the monetary measures along with implementation of effective market regulation are successful in keeping inflation level at the targeted eight per cent, then too savers will get negative real interest.
At 6.2 per cent fixed deposit rate, Rs 100,000 in a fixed deposit account will gain Rs 6,200 as interest, but with inflation at eight per cent the saving will lose value worth Rs 8,000. In addition, depositors have to pay 10 per cent tax on their interest income.
“Since deposit rates have come down substantially there is a chance that deposits might shift to cooperatives and similar semi-formal financial institutions,” expressed Poudyal.
Almost three years ago, when financial institutions were undergoing acute liquidity crunch, the rates had crept up to 11 per cent for savings and 13 per cent for fixed. However, now the banks are flooded with deposits but demand for credit is too low to absorb the excess funds.
At the same time, interbank lending rates and the rate for government securities have also reached near-zero per cent so the alternate interest yields of the banks have become nominal. The first defence of banks against increasing cost has always been lowering the interest being paid to depositors when liquidity is on the higher side.
“To prevent any adverse impact on financial stability NRB is using its Open Market Operations to absorb surplus funds at the banks,” pointed out NRB spokesperson Bhaskar Mani Gyanwali. The central bank has already undertaken reverse repo worth Rs 64.5 billion since September for the very purpose.
“Moreover, the rates are determined by demand and supply forces in the market than anything else,” he pointed out.
source:the himalayan times,17 Dec 2013
LINK
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