Kathmandu. The imbalance seen in Nepal’s banking system in recent years is deepening. Although deposits in banks and financial institutions are increasing, deposits are becoming a burden for banks due to lack of loan mobilization in this proportion. The latest data also confirms this fact.
According to the Nepal Rastra Bank, deposit mobilization of banks and financial institutions has increased by 3.1 percent so far in the current fiscal year. However, credit to the private sector increased by only 1.2 percent in the same period. Normally, credit should expand along with the increase in deposits, but the current data shows that the demand for credit in the banking system is very weak.
Due to the slowdown in loan expansion, banks are stocked with billions of rupees of money that could have been lent but not used. This is the reason why banks are reluctant to collect new deposits. Although they have not formally announced that they will not take deposits, banks are implementing the policy of fixing very low interest rates on fixed deposits, stopping the bidding process for institutional deposits and not wanting to take long-term deposits.
This has a direct impact on the deposit structure. According to the NRB, fixed deposits have reduced to 45.6 percent as of mid-October 2082 from 56.4 percent in mid-July 2081. As banks continue to reduce the interest rate on fixed deposits, savers seem to be shifting their deposits to other areas.
Bankers say that deposits are now seen as a cost in the eyes of banks. The bank’s profit, spread and overall financial performance have increased as it has to pay interest on the amount that has not been disbursed in the loan. This is why banks are trying to shift their deposit structure from fixed deposits to simple savings accounts.
The situation of institutional depositors also confirms this debt-deposit imbalance. According to the NRB, the share of institutional deposits in the total deposits of banks and financial institutions stood at 35.5 percent as of mid-November, 2022 as compared to 35.8 percent in the same period of the previous year. Institutional depositors, who had gone for treasury bills and short-term instruments for some time after the fall in interest rates, have returned to maturity, but banks are reluctant to take long-term deposits.
According to experts, the increase in deposits in the absence of credit is itself a sign of weak demand and investment in the economy. Industries, trade and consumption sectors have not been able to disburse loans even though banks have money. In such a situation, they analyze that deposits have become a liability for the bank, not an opportunity.
Overall, the latest data clearly shows the reality of the banking system. Deposits grew by 3.1 percent but credit expansion was limited to 1.2 percent. Due to this gap, banks have been forced to focus on managing deposits rather than collecting deposits. As long as there is an environment for increased credit flow and economic activity is not sustained, the situation of ‘deposits have become a burden due to lack of credit’ will continue.
Experts say that the continuous decline of fixed deposits can have a deep and multi-dimensional impact on the banking system and the overall economy. Since fixed deposits are the most stable and long-term source for banks, the decline in its share indicates structural weaknesses in the banking system. When banks become more reliant on short-term savings or current accounts, liquidity management becomes more complex and the risk of sudden withdrawal of deposits increases. This puts pressure on banking stability. Although liquidity is high now, experts warn that it could have an impact in the long run as fixed deposits are declining.
The decline in fixed deposits has a direct impact on long-term credit flows. Experts say that loans to sectors such as industry, infrastructure, energy and housing will generally be expanded on the basis of fixed deposits. When such deposits are weak, banks are reluctant to give long-term loans. This can affect the infrastructure projects of economic development. Weak deposit structures also affect the cost and profitability of banks.
