KATHMANDU: Bank interest rates are going up in recent days after slumping to ultra-low levels for more than three years. The weighted interbank interest rate was below 1 percent until March. It started rising from the beginning of April and reached a three-year high of 5.16 percent on Sunday.
The rate, which a bank charge while lending to another mainly to meet the shortfall of reserve requirements at Nepal Rastra Bank (NRB), was last at this level (5.33 percent) on 6 May, 2013. The interest rates had taken a dive since then, as banking system became awash with excess liquidity (loan-able fund).
The devastating earthquakes of 2015, Tarai turmoil and unofficial blockade imposed by India have aggravated liquidity surplus problem of bank and financial institutions (BFIs) due to slowdown in the lending and rise in deposits due to increment in remittance inflow.
Bankers attribute the rise in interbank rates mainly to absorption of the fund by the central bank in recent months through various instruments. “The central bank has mopped up a huge amount of money in recent months through various bonds and other instruments, tightening the liquidity position of BFIs,” Bhuvan Dahal, CEO of Sanima Bank Ltd, said. According to the central bank, it has raised Rs 61 billion so far in current fiscal year compared to the government target of making Rs 88 billion worth of domestic borrowing.
While BFIs are making investment in these central bank instruments, they have also made a commitment to contribute Rs 36 billion in the Economic Rehabilitation Fund, putting strain on their liquidity position. Growth in loan flows, which was almost stagnant in the aftermath of the Tarai turmoil, has also lifted interbank interest rate. Banker Dahal estimates that BFIs have floated Rs 100 billion worth of loans in the third quarter of the current fiscal year.
However, NRB officials have termed the sudden rise in interbank interest rates as a short term phenomenon. “Some of the banks, which have been facing liquidity crunch, might have borrowed at a high rate, making the average rate look higher. Such high rate may not last longer,” Min Bahadur Shrestha, executive director at the Public Debt Management of the NRB, told Republica.
He also said that the interest rates are taking the direction that the central bank wants to see. Shrestha estimates that the intra-bank rate will remain at 2 percent while the deposit interest rates that BFIs offer will increase to 3 percent to four percent. The loan rates will be sustainable if it remains at a double-digit rate. “The interest rate regime is heading toward that direction,” he added.
