Banks still reluctant to slash long-term lending rates

KATHMANDU, Jan 25: Major commercial banks have started slashing long-term deposit rates, as they get anxious sitting over piles of cash because prospects of finding good borrowers and viable projects look bleak in the near future.



However, most of these banks have resorted to this measure without making sincere efforts toward attracting borrowers by reducing credit rates.[break]



A snap survey conducted by Republica among nine major banks showed that fixed deposit rates have come down by up to two percentage points in one-month period, whereas long-term lending rates have declined by only 1.5 percentage points in an isolated case.



This shows that banks are inclined toward exerting pressure on depositors rather than reducing their spread rates -- the difference between interest earned on loans to interest paid by banks on deposit -- to help both borrowers and depositors.



Republica survey showed that Citizens Bank had led the pack in reducing long-term deposit rates, with interest on one-year fixed deposit coming down to as low as nine percent from 11 percent about a month ago. However, lending rates of this bank have come down by mere 0.25 percentage point across the board.



NIC Bank is another institution which has brought down interest rates on one-year fixed deposits.



The rates now stand at as low as 8.5 percent, down 1.5 percentage points, whereas its lending rates have come down by an average of 1 percentage point, except in auto loans, which have come down to as low as 13.49 percent from 17 percent about a month ago.



“The margin at which deposit rates have been slashed is huge as the lethal combination of excess liquidity and gloomy investment climate has raised chances of blotting our balance sheets,” Rajan Singh Bhandari, CEO of Citizens Bank, told Republica on Tuesday.



Banks are currently flush with liquidity, with cash collections of 31 class ´A´ financial institutions topping Rs 63 billion over the first six months of the current fiscal year.



Under normal scenario, this news should have brought cheers among bankers. But the situation is not normal at the moment as there are few borrowers who want to take credit from banks because most of them are either mired in problems created by a stagnant real estate market, anxious because of the current investment environment or waiting for the lending rates to come down.



Since banks earn a major chunk of revenue by extending credit to borrowers, inability to channel cash to these parties raises chances of squeezing profit margins as they still have to pay interest on money parked by depositors in the accounts.



Finance Minister Barsha Man Pun had earlier told bankers that they should not only think of maintaining huge profit margins at a time when the financial sector is under stress.

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