Declining deposit hits banks

KATHMANDU, SEP 20 -
Liquidity crunch in the banking sector is over but deposit crunch seems to have resumed. Commercial banks that saw recovery in deposits in the fourth quarter of last fiscal year after the decline in the third quarter have again witnessed a fall during the first and second month of the current fiscal year.

The deposit has come down by Rs 11 billion during the first two months of this year compared the end of last fiscal year. It has come down to Rs 620 million from Rs 631 billion in mid-July. The deposit in the commercial bank was Rs 623 billion at the end of first month of the current fiscal year.

The deposit is the main source of the financial resources in the banking sector. Even after an increase in the number of banks, overall deposits in them have come down. The interest on deposits is still high as most of the banks have not revised interest rates they had increased during the liquidity crisis to collect funds.

Surendra Bhandari, chief executive officer of Siddhartha Bank admitted that banks were failing to attract deposits. “I think money has gone to the gold and silver market,” he said. His bank also witnessed a decline in deposits due to maturity of some fixed deposits over the last two months.

Banks are not lending aggressively. That is why most of the banks are not facing liquidity pressure even though they are failing to attract enough deposits. “There will be a problem if the deposits don’t increase when lending peaks,” said Upendra Poudyal, CEO of NMB Bank. His bank also witnessed a slight decline in deposits in the second month of this year, which he said was due to slashing of the interest rate on call deposits that encouraged many depositors to withdraw their deposits in that account.

Nepal Rastra Bank governor Yubaraj Khatiwada has already warned that a hasty cut in interest rates could have negative consequences. “The time has not come to slash the interest rate on deposits,” he had said at a recent interaction when some banks started to bring down interest rate on deposit.

It has been assumed that deposits might have come down as the banks withdrew their inter-bank deposits following the monetary policy ban on opening call deposit account with interest to be paid. The central bank had made such a provision in order to discourage the tendency of creating artificial liquidity.

According to Nepal Rastra Bank, inter bank deposit had remained at around Rs 5 billion in recent days. Even if that amount is deducted from the total deposit, the deposit still remains sluggish. President of Nepal Bankers’ Association Sashin Joshi said the withdrawal of inter-bank deposits might not have a huge impact on overall deposits. “Individual deposit has stagnated since last year even after the banks started increasing the interest rate.”

According to him, the deposits had soared due to huge government expenditure during the last two months of the last fiscal year. Now, the development spending has slowed down, with the budget not being presented yet and deposits also starting to decrease. “Until the issue related to policy of income disclosure is addressed, I don’t think the deposit will grow well,” Joshi said. The NBA had lobbied strongly last year to change the policy of income disclosure for the deposit of Rs 1 million as well as on the purchase of real estate above Rs 5 million.

“The economy will not suffer if the cause of decline in overall deposits is the fall in inter-bank deposits,” said Finance Secretary Rameshwor Khanal, who is also a board member of NRB. “But, the economy will suffer if individual deposits also decrease.”

Bankers however, say they are feeling no pressure despite no growth in deposits because lending has also not peaked. The banks are not aggressive for lending this year due to liquidity crunch they faced last fiscal year. Lending increased to Rs 474 billion until the end of second month this fiscal year from Rs 462 billion at the end of the last fiscal year. Currently, banks are in a comfortable position in terms of liquidity with the central bank issuing reverse repo of Rs 19 billion over the last two months to inject liquidity in the banking sector.

The banks may face liquidity pressure if deposit continues to decline in the coming months. The bankers say liquidity crunch will not be so harsh that they experienced last year because the central bank has adopted a stringent policy on liquidity and banks have also realised that excessive lending could be harmful.

A senior NRB official said that deposit is expected to grow this month with the surge in remittance right before Dashain festival.

http://www.ekantipur.com/the-kathmandu-post/2010/09/20/money/declining-deposit-hits-banks/212969/