Citizens Bank International, for instance, said it is now offering short-term lending rates at 12 percent, down from 14 percent. [break]
Laxmi Bank has also done the same. It recently extended loans to Nepal Electricity Authority for six months at 10 percent interest, which is far too low than the prevailing rates. Commerz and Trust Bank too provided loans to the state-owned utility company at 11 percent.
Overall, interest rates on short-term loans - which include demand loans, overdrafts and export bills, among others - have now come down to an average of 12 percent from around 14 percent earlier.
"We had to cut the rates due to suppression of credit demand whereas liquidity surplus continued to soar," Rajan Singh Bhandari, CEO of Citizens Bank International, told Republica.
Nepal Rastra Bank said deposit collections of 31 commercial banks in the first two months of the current fiscal year jumped by Rs 14 billion to Rs 701.85 billion whereas their credit flow dropped to Rs 522.25 billion in mid-September from Rs 522.85 billion in mid-July. Bankers said this trend continued in the third month (mid-October) as well.
Commercial banks, which suffered from liquidity crunch for almost two years, witnessed a sudden rise in deposits over the last three months after depositors started shifting money from development banks and financial companies to big banks due to erosion in trustworthiness of development banks and finance companies. But these commercial banks - currently flush with excess liquidity of around Rs 27 billion - have not been able to find substantial borrowers.
Bankers attributed the sudden drop in credit demand to slump in real estate business - which has trapped investments of many businessmen - and gloomy industrial climate, among others. As a result, banks had invested on short-term Treasury Bills at rates that hardly fetched them interest return of 1 percent.
The latest reduction in interest rates will bring some relief to traders and short-term borrowers, but will make situation no different for industries and general consumers that rely on long-term borrowing.
"They (long-term borrowers) might have to wait for a couple of months to enjoy similar cuts," indicated Radhesh Pant, CEO of Kumari Bank. "The banks are currently not in a position to reduce long-term lending rates because they need to bring down credit-deposit (CD) ratio to 80 percent by mid-January 2012," he told Republica.
Since many commercial banks are struggling to bring the CD ratio to the level set by the regulator, they are not eager to lend rapidly and hence are not interested in slashing long-term lending rates now.
"But if the credit market remains the same after mid-January, banks may finally revisit their strategies and make long-term credit cheaper," Pant stated.
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