Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: The banking system is facing issues of excess liquidity and low interest rates. Despite the continuous decline in interest rates, the lack of growth in loan disbursements has led financial institutions to suffer from excess liquidity.
The average interest rate on fixed deposits has dropped to 5%, while the interest rate on regular savings has fallen to 3%. Similarly, the interest rate on loans has come down to single digits. Although the current economic environment is favorable for investment, the lack of demand for loans has prompted Nepal Rastra Bank (NRB) to continuously absorb excess liquidity.
To further reduce the excess liquidity in the banking system, the NRB has decided to withdraw an additional NPR 40 billion in liquidity on Wednesday. Prior to this, the NRB had already withdrawn NPR 100 billion in liquidity, and now plans to absorb an additional NPR 40 billion.
To ensure that the interest rate on savings deposits does not fall below 3%, the NRB has set the deposit collection rate at 3% as it continues to absorb liquidity. During periods of excess liquidity in the banking system, the NRB withdraws liquidity based on the deposit collection rate. Conversely, during times of liquidity shortages, the NRB provides financial institutions with permanent liquidity facilities at the bank rate.
Through the monetary policy of the current fiscal year, the NRB has set the permanent deposit collection rate at 3%, the bank rate at 6.5%, and the policy rate at 5%.
According to the latest figures from the NRB, there is NPR 641 billion in surplus investable funds within the banking system. Currently, financial institutions have collected deposits totaling NPR 6,447 billion and disbursed loans amounting to NPR 5,179 billion.
The average credit-to-deposit ratio of banks stands at 78.91%, while the interbank interest rate is at 2.96%.
To boost loan disbursement, the NRB has facilitated the capital resources of financial institutions through the monetary policy of the current fiscal year.
The NRB has implemented several provisions, including allowing the issuance of alternative financial instruments, reducing the good loan provisioning rate from 1.20% to 1.1%, maintaining the countercyclical buffer at 0%, and increasing the regulatory retail portfolio limit from NPR 20 million to NPR 25 million.
To promote institutional investment in the stock market, the NRB has also removed the NPR 200 million limit on institutional investors. Despite various provisions by the NRB, loan disbursement in July amounted to only NPR 2 billion. However, NRB data shows that in August, loan disbursement reached approximately NPR 5 billion.
Given the active stock market, the heads of financial institutions expect an increase in loan demand in the coming period.
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