Major revisions have been made on auto and housing loans. The new interest rate on housing can go as high as 14 percent, and on auto loans it could be around 13 percent. Interest rates on housing and auto loans were between 10 and 11 percent just six weeks ago. [break]
As the liquidity shortage in the market worsened, the inter-bank rate rose to a record 12.3 percent on Thursday. State-owned Rastriya Banijya Bank and Laxmi Bank and NIC Bank were the only three lenders in Thursday´s inter-bank lending market whereas leading banks including Nabil and Himalayan were borrowers.
A quick survey conducted by Republica among major commercial banks showed that a majority of banks have revised their lending and deposit rates upwards within the last two weeks.
Among the lending categories, the interest rate on real estate lending, mainly for speculative investment in land, is the highest, ranging up to 17 percent against 15 percent just six weeks back. According to bankers, the short-term Trust Receipt (TR) is among loan categories that carry the lowest interest of 10 percent.
Along with lending rates, interest rates on deposits have also moved upwards by as high as three percentage points within a month, as banks have entered a fresh round of fierce competition to lure new depositors. For instance, Bank of Asia has started to offer 10.25 percent interest on one-year fixed deposits -- so far the highest rate offered by a commercial bank. Development Credit Bank has announced to offer 10 percent.
However, not all banks are following in these footsteps. An officer at Standard Chartered Bank Nepal ruled out immediate changes in its rates. The bank did not believe in knee-jerk reactions; however, it would assess the market dynamics and take appropriate action, he said.
According to bankers, indications are strong that interest as well as deposit rates will go further up, as there is neither concrete reason nor any immediate action to correct the tight market liquidity. However, many pointed toward the huge deposits accumulated with the cooperative sector, which is not yet tied up with the formal banking system, along with huge and quick transactions taking place in the real estate sector that is estimated to have frozen billions of rupees, as the principal causes for the liquidity shortage.
Some bankers like Rajan Singh Bandari, CEO of Citizen Bank International, are of the opinion that both lending and deposit rates will continue to grow to touch the highest interest rate witnessed in 1987 when the banking sector was very competitive. "After a 23-year cycle, we are heading toward the interest rate highs of 1987 where lending and deposit rates used to be 21 and 13 percent respectively on average," he said.
Though the central bank has been injecting capital through repo -- a monetary instrument to inject additional liquidity into the market, the repo amount, according to bankers, is inadequate for bridging the liquidity gap. NRB on Wednesday made a repo call amounting to Rs 4 billion. "The existing liquidity gap stands between Rs 18- 20 billion and there is need for a huge short-term repo call amounting to at least Rs 15 billion to deal with the problem," said Parshuram K Chettri, CEO at Bank of Asia.
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