Banks reject institutional funds amid excess liquidity and low loan demand

KATHMANDU:  In a surprising turn of events, major institutional investors, including the Securities Board of Nepal (SEBON), the Social Security Fund (SSF), and the Employees Provident Fund (EPF), are struggling to deposit billions of rupees in fixed-term accounts at commercial banks. Despite repeated notices and calls for proposals, banks have shown little to no interest in accepting these funds, citing excess liquidity and sluggish loan growth as primary reasons.

SEBON’s Repeated Attempts Fail

SEBON, which manages the Akshay Kosh (Provident Fund), has issued multiple notices to deposit its funds in fixed-term accounts at commercial banks. The first notice, issued in early January, asked banks to submit proposals with competitive interest rates by Poush 23 (January 6). However, not a single bank responded. A second notice was issued on Magh 2 (January 16), giving banks three days to submit proposals with a one-year interest rate. Yet again, no proposals were received. A third attempt on Magh 8 (January 22) also failed to attract any interest.

Social Security Fund Faces Similar Challenges

The Social Security Fund (SSF), which manages NPR 9.34 billion, issued a notice on Poush 25 (January 8) to deposit its funds in fixed-term accounts. However, no banks submitted proposals. Krishna Adhikari, spokesperson for the SSF, revealed that banks have only accepted a fraction of the amount the fund sought to invest. “We are now compelled to invest in treasury bills and government bonds,” Adhikari said.

Employees Provident Fund Sees Decline in Fixed-Term Investments

The Employees Provident Fund (EPF), which typically invests NPR 50 billion annually in fixed-term deposits, has also faced challenges. In the first five months of the current fiscal year, the EPF’s investment in fixed-term deposits shrunk by NPR 8.24 billion. Damodar Suvedi, spokesperson for the EPF, stated that no proposals were received when they called for bids to invest in fixed-term accounts. “Banks are not willing to take the funds, so we are increasing our investments in treasury bills and government bonds,” Suvedi said.

Excess Liquidity and Low Loan Demand

The reluctance of banks to accept institutional funds stems from excess liquidity and a lack of growth in loan demand. A CEO of a leading commercial bank, who spoke on condition of anonymity, explained that the current CD ratio (credit-to-deposit ratio) of banks has dropped to around 60-61%. “With excess liquidity, we are forced to invest in the central bank at just 3% interest. In such a scenario, taking more funds from institutional investors doesn’t make sense,” the CEO said.

Insurance Companies Buck the Trend

While banks are turning away most institutional investors, insurance companies have been increasing their investments in fixed-term deposits. In the last five months, insurance companies have invested NPR 22.32 billion in fixed-term deposits at banks and financial institutions. A bank CEO noted that insurance companies typically seek longer-term deposits, which makes them more attractive. “They have supported us in the past during liquidity crunches, so we continue to accept their funds,” the CEO said.

Broader Implications

The trend highlights a growing challenge for Nepal’s financial sector. With banks flush with liquidity and loan demand remaining stagnant, institutional investors are finding it increasingly difficult to secure fixed-term deposits. This has forced funds like the SSF and EPF to shift their investments to government securities, which may have long-term implications for the country’s capital markets.

What’s Next?

As the fiscal year progresses, institutional investors and banks alike are hoping for a revival in loan demand to ease the liquidity glut. Until then, funds like SEBON, SSF, and EPF will continue to explore alternative investment avenues, while banks grapple with the challenge of managing excess liquidity in a low-interest-rate environment.