Bankers fret as stock of loanable funds drops
Janata Bank gave a pleasant surprise to depositors on Tuesday by offering an annual interest rate of 10 percent on 100-day fixed deposits. This is the highest deposit rate offered by a commercial bank to retail depositors since the country faced a financial crisis around eight years ago.
The bank’s proposition comes at a time when inflation has cooled to a 10-year low of 4.8 percent. This means depositors, who have always complained about negative real interest rates because of soaring consumer prices, can finally reap some real benefits by parking their money at banks.
Yet a sharp rise in the deposit rate also indicates a frantic move by banks to attract funds from the public because of a cash shortage. “Many commercial banks have lately started increasing interest rates to raise fresh deposits, as their stock of funds has been fast depleting,” Anil Keshary Shah, president of the Nepal Bankers’ Association (NBA), told the Post. “If this situation continues, deposit rates will go up further.”
Until three months ago, the interest rate on fixed retail deposits stood at around 7 percent. But with an uptick in demand for loans in the aftermath of the Indian trade embargo and deceleration in flow of money sent home by Nepalis working abroad, banks started witnessing a mismatch in deposit collection and credit disbursement, pushing up deposit rates.
Banks have collected fresh deposits to the tune of Rs111 billion since the beginning of this fiscal year in mid-July till December 23, as per the latest NBA data. In contrast, credit flow stood at Rs141 billion during the same period.
This mismatch has lowered the stock of funds that banks can immediately extend as loans.
Banks are currently allowed to convert 80 percent of deposits into loans. This means that for every Rs100 collected in the form of deposits, only Rs80 can be extended as credit. This, in technical terms, is referred to as credit to core capital-cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent.
“Since deposit flow has slowed down lately, the CCD ratio at some banks has exceeded the 80-percent mark,” said Narayan Prasad Paudel, spokesperson for Nepal Rastra Bank (NRB), the banking sector regulator, without disclosing the names of the financial institutions that have breached the central bank’s regulation.
Such banks must raise fresh deposits or increase core capital to be able to extend loans to borrowers. But since the process of increasing the core capital is relatively longer, banks are now focusing on increasing the level of deposits by offering higher interest rates.
As more and more banks are competing to raise the deposit level, and thereby their ability to disburse credit, deposit rates are going up.
All the 28 commercial banks operating in the country currently have around Rs38 billion that could be immediately extended as loans. Considering the average monthly credit disbursement rate of around Rs26 billion recorded so far this fiscal year, it could be said that banks have loanable funds sufficient for a period of one and a half months.
But what bankers are worried about is the upcoming income tax payment cycle.
The taxman has made it mandatory for taxpayers to deposit 40 percent of their self-declared annual income tax amount as the first instalment by mid-January. Firms have to deposit the second income tax instalment of 30 percent in mid-April and the final instalment in mid-July.
“As per this provision, we expect around Rs40 billion to leave the vaults of banks and financial institutions by mid-January, further reducing the stock of cash,” Ajay Shrestha, CEO of Bank of Kathmandu Lumbini, told the Post. The money will then be locked up in the state coffers. This is what bankers are worried about because the money that has been put in the state treasury does not come out easily because of the government’s inability to spend it.
As of Monday, the government was sitting atop Rs207 billion, largely because of robust tax collection. But it has not focused on increasing its spending, especially capital spending, which has created a liquidity crunch in the banking sector.
Generally, capital spending reduces credit volume at banks because contractors, who have borrowed money to implement various government projects, start repaying their debts.
Likewise, payments made by contractors to various parties following the release of government funds raise the stock of deposits at banking institutions.
Unfortunately, the government has been able to spend only 9 percent of the capital budget of Rs312 billion even after more than five months of the fiscal year have passed.
“If the government cannot ramp up spending, NRB should extend credit facility to banks facing a shortage of funds on the back of securities like treasury bills and bonds,” NBA President Shah, who is also the CEO of Mega Bank, said. “This will help ease the problem of cash shortage at banks.”
Source: The Kathmandu Post