The return on 91-day treasury bill (T-bill) has remained stagnant at almost zero per cent for the last one week, sending jitters among bankers as it is expected to hit profits of financial institutions.
The weighted average rate on 91-day treasury bill fell to 0.0004 per cent last week from 0.2323 on November 18. The average yield on the instrument continued to remain at 0.0004 per cent yesterday when Nepal Rastra Bank (NRB), the central bank, issued treasury bills worth Rs 2.25 billion.
Although rates on these instruments are fixed through quotes made by banks and financial institutions during auctions, the ongoing trend of falling yields is not being viewed positively by bankers.
“The continuity of this trend will hit our profitability this fiscal year, as the money which could have been lent at higher interest rates to other borrowers is being extended to NRB at zero per cent,” said CEO of NIC Asia Bank Sashin Joshi.
NRB currently issues four different types of treasury bills, with maturity period of 28, 91, 182 and 364 days. Among these, the most preferred treasury bill is the one with maturity period of 91 days.
So why are banks and financial institutions quoting such low rates during auctions, despite knowing zero return on treasury bills would hit their profits?
It is said commercial banks with interest spread of over five per cent are deliberately quoting lower rates so that they could bring down average interest spread within the limit fixed by NRB.
Since mid-July, NRB has made it mandatory for commercial banks to cap interest spread at five per cent. But as of mid-October, six commercial banks reported interest spread of over five per cent.
Although interest spread is basically difference between average lending and deposit rates, NRB has allowed commercial banks to factor in returns on government securities while calculating the spread, hence, the ongoing practice of quoting lower rates.
Despite the rock-bottom rates, what is surprising is that banks and financial institutions are rushing to grab these securities.
During the latest round of auction, for instance, NRB received bids worth Rs 17.84 billion, as against the offered amount of Rs 2.25 billion.
Such an overwhelming response is the result of very low credit demand from the private sector.
Not surprisingly, liquidity surplus currently stands at around Rs 35 billion in the banking sector. The level of excess liquidity is expected to go up in the coming days once two tranches of Rs 10 billion mopped up by NRB using the instrument called term deposit matures in the coming days.
As of now, there appears no avenue to channelise these funds that are likely to enter the banking sector soon, as the private sector’s appetite for credit is still very low and the government has not sent convincing signals of raising its capital expenditure.
The government allocated Rs 116.75 billion for capital expenditure this fiscal year, which began in mid-July. But as of yesterday, only Rs 8.16 billion, or 6.99 per cent of the allocated amount, was spent. As government expenditure remains low and revenue continues to increase, the government’s treasury surplus stood at Rs 72 billion as of Friday.
Such a huge chunk of idle money in the state coffers has become another cause of concern for bankers, as the government is likely to default on its promise of raising Rs 52.75 billion in domestic debt.
Last fiscal, the government did not even raise half of the domestic debt of Rs 44 billion as committed because of treasury surplus.
source: the himalayan times,3 dec 2014
LINK
The weighted average rate on 91-day treasury bill fell to 0.0004 per cent last week from 0.2323 on November 18. The average yield on the instrument continued to remain at 0.0004 per cent yesterday when Nepal Rastra Bank (NRB), the central bank, issued treasury bills worth Rs 2.25 billion.
Although rates on these instruments are fixed through quotes made by banks and financial institutions during auctions, the ongoing trend of falling yields is not being viewed positively by bankers.
“The continuity of this trend will hit our profitability this fiscal year, as the money which could have been lent at higher interest rates to other borrowers is being extended to NRB at zero per cent,” said CEO of NIC Asia Bank Sashin Joshi.
NRB currently issues four different types of treasury bills, with maturity period of 28, 91, 182 and 364 days. Among these, the most preferred treasury bill is the one with maturity period of 91 days.
So why are banks and financial institutions quoting such low rates during auctions, despite knowing zero return on treasury bills would hit their profits?
It is said commercial banks with interest spread of over five per cent are deliberately quoting lower rates so that they could bring down average interest spread within the limit fixed by NRB.
Since mid-July, NRB has made it mandatory for commercial banks to cap interest spread at five per cent. But as of mid-October, six commercial banks reported interest spread of over five per cent.
Although interest spread is basically difference between average lending and deposit rates, NRB has allowed commercial banks to factor in returns on government securities while calculating the spread, hence, the ongoing practice of quoting lower rates.
Despite the rock-bottom rates, what is surprising is that banks and financial institutions are rushing to grab these securities.
During the latest round of auction, for instance, NRB received bids worth Rs 17.84 billion, as against the offered amount of Rs 2.25 billion.
Such an overwhelming response is the result of very low credit demand from the private sector.
Not surprisingly, liquidity surplus currently stands at around Rs 35 billion in the banking sector. The level of excess liquidity is expected to go up in the coming days once two tranches of Rs 10 billion mopped up by NRB using the instrument called term deposit matures in the coming days.
As of now, there appears no avenue to channelise these funds that are likely to enter the banking sector soon, as the private sector’s appetite for credit is still very low and the government has not sent convincing signals of raising its capital expenditure.
The government allocated Rs 116.75 billion for capital expenditure this fiscal year, which began in mid-July. But as of yesterday, only Rs 8.16 billion, or 6.99 per cent of the allocated amount, was spent. As government expenditure remains low and revenue continues to increase, the government’s treasury surplus stood at Rs 72 billion as of Friday.
Such a huge chunk of idle money in the state coffers has become another cause of concern for bankers, as the government is likely to default on its promise of raising Rs 52.75 billion in domestic debt.
Last fiscal, the government did not even raise half of the domestic debt of Rs 44 billion as committed because of treasury surplus.
source: the himalayan times,3 dec 2014
LINK
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