With excess liquidity in hand, banks and financial institutions (BFIs) have started lowering their interest rates.  Of late, a majority of BFIs are advertising their decreased rates. The changes in the interest rates were seen after the Tihar festival.

Of late, commercial banks have about Rs 40 billion of liquidity. It can further go up in the near future once the cash that is out of the system returns after the Dashain and Tihar festivals.

“If the current situation prevails, the rate on deposits as well as credit will come down after December,” said Kumari Bank CEO Radhes Pant. “There has been little change at present. Although there has not been a change in the rate of fixed deposits, slight change have been made in the rates on general saving.”

“It is an indication of a comfortable liquidity position,” said Diwakar Poudel, chief of corporate affairs at Standard Chartered Bank. The bank has also published the revised interest rates.

“We have kept the old scheme as usual and introduced a new scheme with an interest rate of 8.5 percent,” said Commerz and Trust Bank CEO Anal Bhattarai. “Various indicators are piling pressure on us to reduce the interest rate.”

As commercial banks have to invest 20 percent of the total deposits on various instruments yielding low interest rate, there can be significant reduction on the rates, according to Bhattarai. “After collecting deposits paying as high as 12 to 13 percent, we are investing in instruments yielding 1 percent,” he said. “If such interest rate increases, rates on both deposits and loans with change.”

However, bankers say there is equal chance of a surge in the interest rates since they are yet to ascertain whether the current ease in the liquidity situation will be sustainable.

Sanima Bikas Bank CEO Kumar Lamsal said reduction in the interest rates by commercial banks could increase the risk. As such, they opted for marginal reduction of the rates of new fixed deposit accounts, according to him.

“If commercial banks reduce the interest rates, it will affect development banks,” said Lamsal. “Therefore, we reduced the rates on new fixed deposits only.” The bank, which is in the process of becoming a commercial bank, has decreased the rate on fixed deposits from 13 to 11.75 percent.

Apart from income earned from lending, banks’ other source of income is investment in treasury bills and inter bank lending which are fetching an income of about 1 percent at present.

A treasury bill is a financial instrument issued by the central bank and of late a 91-day treasury bill is fetching 1 percent interest. In May, the interest rate on treasury bills was as high was 9 percent and it continued to decline since. Likewise, the inter-bank lending which was as high as 11 percent has also come down to 1 percent.

The central bank has, however, asked the banks to not reduce the interest rate significantly. “If the interest rate goes down significantly, it may encourage capital flight,” a central bank official said.

source: The Kathmandu Post, 7 Nov 2011