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Interest rates on fixed deposits skyrocket

Kathmandu, January 26, 2017: To maintain the CCD (credit to core capital cum deposit) ratio as per the central bank’s requirement, banks have started offering high interest rates on fixed deposits.

Two class ‘A’ financial institutions — NCC and NIC Asia — are offering an eye-popping 12 per cent for individual savers. According to bankers, interest rate for institutional depositors stands at an even higher 12.75 per cent.

The average lending rate, on the other hand, is between 10 to 11 per cent. This means BFIs have been accepting high-cost deposit to maintain the CCD ratio of 80 per cent.

The CCD ratio is calculated by dividing loans disbursed in local currency by the sum of local currency deposit and core capital, which includes equity capital and portion of net income retained by institutions. This outcome is then multiplied by 100 and it should not exceed 80.

As per the financial statements of the second quarter published by eight commercial banks out of 28 in operation, most of them are in a tight position — with their CCD ratio only marginally below 80 per cent.

“Banks are under pressure to hike up their rates as there are high chances of people shifting their deposits from the bank offering modest interest on deposit to the one giving higher returns,” said Ashoke Shumsher Rana, CEO of Himalayan Bank.

Thus, even the government-owned Rastriya Banijya Bank, which is in a comfortable position in terms of CCD ratio of around 69 per cent, is preparing to offer high rates to retain its savers.

Those in the know say there has been an unhealthy competition in the banking fraternity in recent times due to lack of efficient supervision from Nepal Rastra Bank. Some banks have been rampantly expanding credit to ‘risky areas’ as defined by the central bank like hire purchase, home loan, real estate, overdraft, loan against collateral of stocks and others to earn high profit in the short term.

“Some banks have violated the central bank’s rule, which allows BFIs to take only 50 per cent of the savings from institutional depositors and have also breached the CCD ratio norm,” said Gyanendra Dhungana, CEO of NB Bank.

The lending capacity of banks and financial institutions (BFIs) had improved along with increment in their paid-up capital. Consequently, credit expansion of commercial banks increased by a whopping Rs 204 billion against deposit growth of Rs 155 billion in the first half of this fiscal.

Bankers were aware of the possible liquidity crunch ‘trap’ since the beginning of the second quarter and Jyoti Prakash Pandey, CEO of Nepal Investment Bank, said banks are at fault to a large extent for the current situation. “Banks continued to expand credit haphazardly for high profitability, while overlooking remittance slowdown and low capital expenditure, which caused slow deposit growth.”

Moreover, bankers are at odds with regards to raising the CCD ratio from existing 80 per cent to 85 per cent. Upendra Poudel, former president of NBA, who is also CEO of NMB Bank, said that revising CCD ratio is not the ultimate solution to the liquidity crisis.

However, some bankers are arguing that banks have enough fund to lend if the central bank shows flexibility in CCD ratio because core capital amount has increased significantly from when commercial banks had to have paid-up capital of Rs two billion and this requirement has been now raised to Rs eight billion by end of this fiscal.

If the credit to core capital cum deposit ratio is revised and increased to 83 or 85 per cent, banks will have room to expand credit without adding more deposits. As per the current provision, if a bank collects deposit of Rs 100, it can float credit of up to Rs 80 and Rs 20 needs to be reserved as cash and invested in government securities.

Reportedly, Nepal Bankers’ Association (NBA) — umbrella organisation of class ‘A’ financial institutions in the country — will come up with a common voice after tomorrow’s meeting on how to tackle the severe liquidity crisis.

Around next week, after the allotment of further public offering (FPO) of Nepal Life Insurance Company, around Rs 55 billion of those who did not get FPO is expected to return to the banking system. Some BFIs may offer even higher rates to tap the deposits, one of the bankers told The Himalayan Times.

Daily transaction in Nepse drops

Investors have been lured towards the primary market in recent days as banks and financial institutions are offering attractive interest rates on short-term fixed deposit.

This is clearly visible through the daily transaction amount at Nepal Stock Exchange (Nepse). The average daily transaction, which stood at Rs 1.38 billion in the first quarter of fiscal 2016-17 (mid-July to mid-October) had dropped to Rs 711.23 million in the second quarter (mid-October to mid-January).

The average daily turnover at Nepse in the month of January till Wednesday stands at Rs 393.27 million.

CNI urges govt to raise CCD ratio

The Confederation of Nepalese Industries (CNI) has suggested the government to increase the credit to core capital cum deposit (CCD) ratio to 85:15 from 80:20 that financial institutions are currently maintaining to address the current liquidity crunch.

Informing that the current  liquidity crunch has increased lending rates in the financial sector,  CNI said that the government should make CCD ratio flexible for the time  being until the liquidity crisis has been addressed.

Issuing a press statement today, CNI also suggested the government to reduce cash reserve ratio (CCR) by one per cent for commercial banks, development banks and finance companies, which is currently at six percent, five per cent and four per cent, respectively.

Similarly, CNI also said that if the government is able to increase capital expenditure it would help address the liquidity crisis.