Kathmandu. The management of excess liquidity has become the main challenge in the Nepali banking sector at this time. Banks and financial institutions have started adopting new and risky strategies to reduce their cost of funds as money accumulates in the market but the demand for loans does not increase. <\/p>\n
A new debate has erupted in the banking system after deposits started collecting deposits at lower interest rates than the floor rate of the interest rate corridor set by the Nepal Rastra Bank. In particular, banks are ready to lose the Permanent Deposit Facility (SDF) provided by the Rastra Bank in the race to reduce the base rate by reducing the interest rate and attract borrowers. <\/p>\n
As per the current arrangement of the Nepal Rastra Bank, the lower limit of the corridor has been set at 2.75 percent to stabilize the interest rate. SDF is a provision for banks to keep their surplus money safe in the central bank and get 2.75 percent interest. However, there is a strict condition for availing this facility \u2013 the minimum interest rate on savings or fixed deposits given by the bank to depositors should not be less than 2.75 percent. <\/p>\n
If a bank collects deposits below this limit, then it will stop the legal way to deposit money in the Rastra Bank and get interest. In recent times, some commercial banks and development banks have reduced the deposit rate further, ignoring the fixed interest available through this facility. <\/p>\n
Standard Chartered Bank has reduced the interest rate on ordinary savings and fixed deposits to 2.48 percent. Similarly, Narayani Development Bank and Excel Development Bank have fixed the interest rate at 2.40 per cent. This rate is much lower than the 2.75 percent threshold set by Nepal Rastra Bank. <\/p>\n
The main purpose of this deliberate fall below the floor rate seems to be to reduce the cost of deposits. “We have reduced the interest rate in a planned manner,” said a banker, “The need of the hour is to bring down the base rate by reducing the cost of deposits from the 2.75 percent interest earned by keeping money in the central bank.” It is only when the base rate is reduced that credit becomes cheaper in the market and attracts investors. \u2019<\/p>\n
There is a lot of money to invest in the banking system right now. Based on the loan-deposit ratio (CD ratio), about Rs 13 trillion can be invested. Out of this, around Rs 900 billion has been withdrawn by the Nepal Rastra Bank through various instruments. But even as the central bank exploits liquidity, banks have chosen to reduce their own operating costs rather than safer, but lower-yielding government tools. <\/p>\n
According to a central bank official, institutions that pay less than 2.75 percent interest on savings or fixed deposits are automatically ineligible for SDF facility. Also, there is a strict rule that such a facility cannot be used without interbank clearance. <\/p>\n
This situation shows two clear trends in the banking sector. On the one hand, the Rastra Bank is trying to stabilize the interest rate by keeping it within a certain limit, while on the other hand, the banks are forced to reduce the interest rate by leaving the facility provided by the rules as they cannot bear the pressure of more liquidity. <\/p>\n
According to the analysis of banks, it is beneficial in the long run to keep your financial statements accurate by giving less interest to depositors and expanding the business by providing loans at cheaper interest rates than earning less interest by keeping money in the central bank. However, it has a direct impact on the returns of ordinary depositors. <\/p>\n
In conclusion, the sluggish demand for credit and high liquidity have put pressure on the banks. Banks are now ready to break the ‘floor rate’ limit due to the strategy of controlling costs and competing in the market by reducing the base rate. This is sure to put pressure on other banks to reduce interest rates further in the coming days. This could lead to a new twist in the interest rate structure of the overall banking system.<\/p>\n","protected":false},"excerpt":{"rendered":"
Kathmandu. The management of excess liquidity has become the main challenge in the Nepali banking sector at this time. Banks and financial institutions have started adopting new and risky strategies to reduce their cost of funds as money accumulates in the market but the demand for loans does not increase. A new debate has erupted […]<\/p>\n","protected":false},"author":16,"featured_media":269713,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[45117,45031,45159],"tags":[],"class_list":["post-301870","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bank-finance-en","category-banner-news-en","category-news-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/301870","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/comments?post=301870"}],"version-history":[{"count":1,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/301870\/revisions"}],"predecessor-version":[{"id":301871,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/301870\/revisions\/301871"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/media\/269713"}],"wp:attachment":[{"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/media?parent=301870"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/categories?post=301870"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/english.insurancekhabar.com\/ikbrapi\/wp\/v2\/tags?post=301870"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}