As liquidity eases, investors may have a reason to cheer

Kathmandu, June 13, 2013

There are signs that the liquidity crunch in the market might be easing.

Shortfall in deposits compared to loans disbursed had been straining the capacity of the banks and financial institutions to supply money into the market. However, the relief comes after the institutions that were reeling under shortage of funds succeeded in attracting more deposits by suddenly increasing the rate of interest on deposits.    

The interest rates, though, are expected to fall within a month.

Until now, some banks and finance institutions were struggling to maintain even the minimum CD ratio fixed by Nepal Rastra Bank. Though most of them have now been able to maintain the CD ratio, they haven’t been able to disburse loans as per the existing demand.

Despite the signs of easing of liquidity, however, the flow of money is expected to increase only after the release of the new budget that would to be followed by the announcement of a new monetary policy.

Low government spending and minimal rate of interest had led to the liquidity crunch. According to Finance Ministry, Rs 50 arab has been lying unused in the state coffer, which contributed to the liquidity crunch in the market.    

Also share market investors expect NEPSE to perform better with the easing of liquidity in the market. But investors would be cautious until they know that the improved liquidity situation is here to stay for a while.

Base rate may affect deposit interest rate

KATHMANDU, JAN 21. 2013

The deposit interest rate, that is already painfully low, is expected to further decline as banks now are under pressure to maintain lower base rate.

At present, only a few banks have published the base rate which is above 10 per cent.

Commerz and Trust Bank has fixed 10.14 per cent as base rate, Grand Bank 10.49 per cent, and Kist Bank 11.12 per cent. These banks are providing a maximum of six per cent interest on savings deposit.

The base rate is calculated based on cost of fund, Cash Reserve Ratio, Statutory Liquidity Ratio, operational cost, and return on assets. Since the major expense of banks is on paying interest for deposits, slashing the deposit rate is the easiest measure to pull down the base rate.

The application of a base rate is supposed to make the interest rate regime of the banks transparent as it provides basic referential floor for lending rates charged by the banks.

“Banks with higher base rates will definitely feel the pressure to lower their operation cost in order to improve their competitiveness which might affect the deposit interest rate,” pointed out spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.

“The nature of the movement of interest rates is cyclical. The forces of demand and supply make the interest rate go up and down, but eventually market forces bring the balance back,” Gyanwali added, referring to the fluctuation in the rate in the current decade.

Interest rates had gone high in 2010 as the liquidity crunch hit the banking sector. The liquidity shortage in the financial system had pushed the deposit interest rate for savings to as high as 12 per cent and lending had reached 20 per cent.

However, since the liquidity situation started to ease, deposit rates have also plunged while lending rate has not gone down accordingly.

NRB had introduced the concept of base rate that provided banks a reference rate for determining lending rates back in November compelling them to make their interest structure transparent. Banks had to publish the base rate obtained by the formula provided by NRB starting mid-January.

As the base rate will be public, those banks whose cost of funds are lower will have to justify the high lending rate, while banks with higher base rate will have to efficiently manage their cost in order to bring down the base rate, Gyanwali added.

Though a base rate is only indicative as the banks can charge lower interest if it is prudent, the general public will have an inclination towards those banks that may provide loans at a lower rate.

“Though the base rate concept is beneficial for the banking sector as a whole, it might further demarcate the banks into older and comfortable, and the new and struggling ones,” said chief executive of a commercial bank.

“Moreover, this is an acid test for the relatively new banks that are trying to establish themselves and have to expand their deposit base, but at the same time they will have to lower deposit rate to manage rising cost of fund, and they will have to be innovative,” added the banker.

Earlier, Nepal Rastra Bank had decided to make the base rate a mandatory floor for the lending rate. However, in its final directive, it did not make it obligatory because new banks would have to charge higher lending rate as their base rate would have been higher than the already established ones.

Source: THT

NRB mulls interest rate corridor

KATHMANDU, July 4, 2012

The formulation of an interest rate corridor by the central bank is expected to do away with the bipolar spikes in the short-term interest rate.

The central bank is preparing a mechanism to formulate an interest rate corridor from the coming fiscal year as an additional monetary instrument of the monetary policy in order to handle short-term interest rate volatility.

“Nepal Rastra Bank (NRB) is working on preparing the mechanism for interest rate corridor which will symbolically determine the ceiling and floor for the interest rate,” according to the spokesperson for the central bank Bhaskar Mani Gyanwali.

In recent times, the domestic financial market has witnessed short-term interest rate skimming to an all time low following liquidity flush after going through a period of high interest rate.

The interest rate of treasury bills, being used as repo instrument and inter-bank lending rate indicate the movement of short-term rates. A 91-day treasury bill that was traded at 9.6 per cent in early 2010 has reached 0.9 per cent.

Likewise, inter-bank rate which had reached 14 per cent in 2010, has slipped below one per cent since December 2011 and rarely rose above the level. “Formulating an interest rate corridor is expected to counter such volatility and help form a tentative interest band that will more or less guide the interest rate movement of the money market,” added NRB spokesperson Gyanwali.

The central bank will indicate the interest band by determining the maximum rate at which the central bank will sell securities and minimum rate at which it will purchase securities. The movement of the short-term interest rate will take place between the two extremes.

At present, the central bank does not directly dictate the interest rate in the money market but uses its repo and reverse repo rate to guide the interest rate which now seems to be ineffective as interest rate for lending is still higher than 15 per cent in spite of treasury bills being traded at less than one per cent.”

There are not enough instruments to invest surplus funds amounting up to 25 per cent of the deposits, while the yield of government securities such as treasury bills is almost non-existent, that is why banks are unable to reduce lending rates,” said vice president of Nepal Bankers’ Association Upendra Paudyal, who is also the chief executive of NMB Bank.

Banks are compensating their cost of deposit collection by continuing with higher lending rate due to painfully low inter-bank and treasury bills rate. Both higher and lower short-term interest victimises the borrowers alike.

“If the central bank formulates an interest rate corridor, banks will be guaranteed a certain level of yield on securities, and both depositors and borrowers will get a better rate that is why we have been advocating for an interest rate corridor,” added Paudyal.

The profits of the banks have shrunk due to increased interest cost and the absence of projects to finance, and limited and low yielding avenues for alternative investment.


Source: THT

Dramatic Lending Hike In Agri Sector Raises Eyebrows

 KATHMANDU, June 25, 2012

A dramatic hike in commercial banks´ lending to the agricultural sector has raised eyebrows of many, raising question whether the growth is real.

A total of 32 commercial banks extended loans of Rs 7.27 billion in the first 10 months of the current financial year, marking a growth of 51.3 percent since mid-July, Nepal Rastra Bank (NRB) figures show. In the same period last year, credit extended by commercial banks to the agricultural sector had gone down by Rs 744.4 million.

 

Source: Republica

Owners selling property at distress value, under bank's pressure

Realty owners and developers have been selling off their assets at distress value under pressure from banks and financial institutions to repay their loans.

Vibor Properties, a subsidiary of Vibor Bikas Bank, recently sold the Rabi Bhawan Boutique Hotel and Mansion, a property spread over 45 ropanis, to Surya Housing for Rs 1.23 billion.

Senior officials of Vibor Properties said they lost Rs 150 million in the deal.

According to Vibor, it has spent Rs 1.38 billion on developing the property with Rs 800 billion as debt financing from banks, Rs 460 million as equity financing and Rs 120 million as interest capitalization. A consortium of 10 commercial banks led by Siddhartha Bank had provided Rs 800 million to Vibor Properties to develop the property in August 2009.

With Vibor Properties struggling to pay the interest since mid-July 2011, the consortium of banks asked it to pay back the loan by selling off the property at distress value. According to Vibor sources, the company even tried to bring new investors including a number of foreign financiers to develop the property, but it was unsuccessful.

One of the prospective investors was a Hong Kong-based investment company which showed willingness to invest US$ 25 million to develop the property but later pulled back. Another company from Bangladesh had also showed interest, but the deal failed to take off, said Vibor sources.  Vibor officials complained that the banks unilaterally increased the interest rate to 16.5 percent while the loan deal had stated 12 percent. “Our request to the consortium banks to restructure the loan was ignored and we were forced to sell it.”

Vibor said the banks even threatened to publish the names of the owners in the papers and auction off the property if they didn’t repay the loan soon.

“The banks behaved in the way of traditional money lenders, and we had no option but to sell the property at a loss,” said the source. “Vibor Properties and other portfolio partners owning the property lost Rs 150 million while selling the property at the aforementioned price.”

Meanwhile, the bankers said that they had no option but to push Vibor Properties to repay the loan. “We know realty developers are having a difficult time, but we have our own problems too,” said one of the bankers in the consortium. “Selling the property at distress value was the best option at present; and developers should think about surviving, not about profit making.”

Sources said other banks in the consortium even pressurized their leader Siddhartha Bank to recover the loan. “In the future, the market will see more instances of selling at distress value,” said the banker.

Source: Kantipur