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June 08, 2017

The Kathmandu Post, 6 June 2017 

Institutional deposit rates have gone through the roof, with banks offering returns as high as 14 percent on money parked by institutions.

This rate is almost 90 percent higher than what it was at the end of September.

Lately, even ordinary people who deposit money in fixed accounts are being offered interest rates of 12 percent, while saving deposit rates, which used to hover around 2-3 percent in the past, have shot up to a historically high level of 8 percent.

Banks are currently rushing to offer higher interest rates on deposits as they are facing a shortage of money that could be immediately extended as loans. This is a result of a mismatch in deposit collection and credit expansion.

Deposit collection of commercial banks went up by Rs202 billion since the beginning of this fiscal year in mid-July to Rs1,954 billion as of May 26, according to the latest report of the Nepal Bankers’ Association. In the same period, Rs278 billion in fresh credit was extended, raising the credit portfolio of 28 commercial banks operating in the country to Rs1,664 billion.

Deposit collection has trailed behind credit disbursement since the beginning of this fiscal year because of deceleration in remittance inflow. All the while, demand for credit has been continuously increasing since the first week of February 2016 when the almost five-month-long trade blockade imposed by India was lifted. This is depleting the deposited stock at banks. Hence the competition to collect more deposits at higher interest rates.

Higher deposit rates are good news in a country like Nepal where consumption is pretty high, while savings have hit a rock bottom. The latest report of the Central Bureau of Statistics says Nepalis spend 89.75 percent of the gross domestic product on consumption. This means the country’s gross domestic savings hover around 10.25 percent of the GDP. Higher deposit rates, therefore, are expected to inculcate saving habits.

Nepalis need to save more because savings are transformed into investments. Investments are much needed in Nepal to construct physical infrastructure, build human capital and remove other bottlenecks that are creating binding constraints on economic growth.

 There is a school of thought that believes spending on consumption also contributes to growth. This logic is not flawed. But the reality is that Nepalis are consuming a lot of imported goods. This means money spent on consumption is generating revenue for foreign companies.

The time has come for Nepalis to save more so that the money could be used to build manufacturing units and infrastructure projects that create jobs and contribute to economic growth. It’s a pity that the so-called big banks of Nepal do not have adequate funds to build one big infrastructure project. Savings should, therefore, go up.