Interest rates unlikely to rise despite shortage of funds

October 16, 2019

Rajesh Khanal, The Kathmandu Post, October 16, 2019

Bankers say credit demand swelled during the festival season to purchase consumer items.

Banks say a shortage of loanable funds persists even though Nepal Rastra Bank has introduced several tools to address the scarcity and high-interest rates. They added that interest rates would not rise immediately despite the liquidity crunch.

According to the central bank, loan issues by banks amounted to almost double their deposit collection during the two and a half months from mid-July to September-end. During this period, banks received Rs61 billion in deposits and lent out Rs112 billion.

Gyanendra Prasad Dhungana, president of the Nepal Bankers’ Association, said banks were having a hard time managing funds to provide loans.

“Since the start of the fiscal year, banks have been facing an overwhelming demand for loans, mainly for the construction of infrastructure, hydropower plants and hotels,” said Dhungana, adding that this had prompted banks to resort to aggressive lending.

According to Dhungana, credit demand also swelled during the festival season to purchase consumer items. “During the one-month Dashain-Tihar period, depositors withdraw large sums of money from their accounts, adding to the shortage,” he said.

Dhungana ruled out the possibility of an immediate rise in interest rates as banks expect the shortage of loanable funds to ease next month after the Tihar festival. “Customers could redeposit their money after the conclusion of the festivals, so banks are in a wait and watch mode,” he said.

Nepali banks have been encountering a persistent dearth of loanable funds for almost the past three years. The central bank claims to have resolved the chronic liquidity shortage through the monetary policy, but this has not happened in the domestic banking system.

With Nepal Rastra Bank adopting a policy to boost the amount of funds available for investment in the productive sector, credit demand has increased sharply, said bankers. The central bank has expanded projected credit to the government by 24 percent, up from the last fiscal year's target of 22.5 percent, through the monetary policy. It has also raised the projected loan amount to the private sector by 1 percentage point to 21 percent.

Bhuwan Dahal, chief executive officer of Sanima Bank, said some banks had even started taking interbank loans to fulfil their cash reserve requirement. The cash reserve ratio is a percentage of the total deposits commercial banks are required to maintain in the form of cash reserve with the central bank. Nepal Rastra Bank has asked banks to maintain the cash reserve ratio at 4 percent.

The growing shortage of loanable funds has prompted several banks to hike the interest rate on savings to attract deposits. “When the interest rate on deposits increases, it is likely to affect the interest on loans,” said Dahal, adding that the interest rate on loans might go up by a nominal amount.