Large fund-holding institutions, including the Nepal Rastra Bank, Employees Provident Fund, Citizens Investment Fund, Securities Board of Nepal, Nepal Telecommunications Authority, Nepal Army, Nepal Police, and others, which have established funds by collecting money from employees' salaries, are under stress.
What you should know
As the excess liquidity in the financial system continues to decline, banks and financial institutions have adopted a policy of refusing deposits. Although they do not say they will not accept deposits directly, banks and financial institutions have stopped charging very low interest rates and even started bidding for institutional deposits.
There has been excess liquidity in the financial system for the past three years. With no new loan demand, banks have accumulated trillions of rupees of loanable funds. Banks have continuously reduced interest rates on deposits. But even at low interest rates, banks are not willing to take more deposits. Savers (individual and institutional) have been directly affected by this. Since the savings amount is low and there is no organization, the complaints of ordinary savers cannot come out. But at this time, institutional depositors are suffering because they are not able to keep deposits in banks.
‘Where did you get the idea that we do not take deposits at all?’ A banker said, ‘But, banks have started reducing deposits in a planned manner.’ Even in the absence of loan demand, banks should continue to pay interest on deposits. The official said that since there is no income but expenses, banks have had to adopt a strategy to reduce the cost of deposits as much as possible. In the past, institutional depositors used to get interest of up to 13 percent on fixed deposits. Now, the interest rate has come down to only around 2.75 to 3 percent.
Large fund institutions such as the National Bank, Employees Provident Fund, Citizens Investment Fund, Nepal Securities Board, Nepal Telecommunications Authority, Nepal Army, Nepal Police, etc., which have established funds mainly by collecting money from employees' salaries, are under stress. In the past, they were earning good interest income by depositing money at high interest rates in commercial banks. Now, not only has the interest income of these institutions decreased, but they have to beg for money after banks have stopped taking deposits, according to sources.
‘Even though the interest is low, we are worried. Some institutions have already held discussions in the board of directors on how to manage the money in a way that generates good interest income. Some have also started investing in other investment instruments such as government bonds, treasury bills, and development bonds. Spokesperson Guru Prasad Poudel said that such a problem also exists in the National Bank. He said that the National Bank keeps money in call accounts after not receiving the bids as called from banks and financial institutions.
‘An institution can mobilize institutional deposits from any one firm, company or corporate body up to a maximum limit of 10 percent of its total deposits,’ said Poudel. ‘The share of deposits from government institutions and corporations, public limited companies, savings and credit cooperatives and funds operated under such institutions and corporations cannot exceed 50 percent of the total deposits of the institution.’ Spokesperson Poudel said that the bank can make an independent decision on deposits to be taken through bidding within the mentioned limit.
‘Only half of the amount of bids that are invited to keep money in the bank has started coming in. This problem has arisen because there is more liquidity in the financial system than the bank not taking it,’ said Kabiraj Adhikari, Executive Director of the Social Security Fund. ‘Let’s say, earlier, when a bid was invited to keep a deposit of Rs 5 billion, a bid of Rs 10 billion was received. Now, when a bid is invited for Rs 10 billion, only Rs 5 billion is received.’ The Social Security Fund has a fund of about Rs 1026 billion. Of that, 50 percent is invested in fixed deposits and the rest in government bonds, treasury bills, development bonds, and collective investment funds, the official said.
Parbat Kumar Karki, executive director of the Citizens Investment Fund, said that institutional depositors are in a difficult situation as banks are taking fewer deposits. “When liquidity was low, there was a reluctance to withdraw deposits, but now that there is sufficient liquidity, banks are reluctant to take deposits openly,” he said. “We have to make many requests to take deposits. In recent months, there have been no bids as requested.” He said that after the banks stopped taking all deposits, the fund increased its investment in government bonds, development bonds, and treasury bills. “We are encouraging participants to take more loans by providing various facilities along with reducing the interest rate,” he said.
Binaydev Acharya, executive director of the Nepal Securities Board, admitted that in recent months, very few bids have been received despite inviting bids to place money in fixed deposits. The last time the Securities and Exchange Board of Nepal (SEBON) invited bids for fixed deposits worth Rs 910 million, he informed, adding that the banks had to issue three notices after receiving only low bids. “In recent months, we have received significantly fewer bids than we had invited,” he said. “Earlier, we had invited bids for fixed deposits worth Rs 910 million, but the first time, only Rs 350 million was received. The deposit could be placed only after three bids were issued. Another Rs 1 billion will have to be placed in fixed deposits, how many times will we have to issue notices?”
The bank admits that it has not been able to take all the deposits available in the market. Currently, the bank has not returned the savings of the general public who come to collect money. However, it has started to hesitate to take deposits from institutional depositors who collect through bids. Nischal Raj Pandey, Chief Executive Officer of Sanima Bank, also admitted that the bank has not been able to take the deposits that institutional depositors wanted.
‘With the increase in liquidity, banks have now introduced long-term (five/six years) term plans. But institutional depositors do not seem to want to keep long-term deposits,’ said Pandey. ‘There is a directive from the regulatory body that call deposits should not exceed 10 percent of the total deposits. They can be kept in current deposits. But since the interest rate on them is low, depositors have lost interest.’ It is not that banks are not taking deposits at all. But he says that not all banks are trying to increase deposits rapidly due to lack of credit flow and continuous increase in deposits.
Devendra Raman Khanal, Chief Executive Officer of Rastriya Banijya Bank, said that since the banks have a lot of money in the bank, they have not taken many deposits from outside. ‘Banks take deposits based on their needs and risk profile. Right now, we have so many deposits, that is why we have not been able to add many deposits. The CD ratio is around 60 percent,' he said, 'The amount of deposits available for lending has accumulated to the same extent. This has also increased the cost.' There is also a ceiling from the regulatory body for institutional depositors. However, he says that the bank is taking deposits as per the requirement.
As of last Asoj, the share of institutional deposits in the total deposits of banks and financial institutions is 35.3 percent. In mid-Asoj 2081, the share of such deposits was 35.8 percent. In mid-Asoj 2082, the share of current accounts among the total deposits of banks and financial institutions is 6.4 percent, savings 38.7 percent, and time deposits 46.4 percent. In the same period last year, the share of current accounts was 5.4 percent, savings 32.7 percent, and time deposits 54.8 percent. Compared to last year, the share of ordinary savings has increased this year, while time deposits have decreased.
By the end of the first quarter of the current fiscal year, banks and financial institutions have accumulated more than 1.1 trillion rupees in loanable funds (excess liquidity). Liquidity has been accumulating in banks since two and a half years ago. The increase in remittances in recent days has accelerated the accumulation of money in banks.
With the expansionary budget and monetary policy in the current fiscal year, it was expected that credit flow would increase and the loanable funds accumulated in banks would decrease. There were signs of an increase in loan demand in the initial months. However, banks say that due to the uncomfortable situation created after the protests on 23 and 24 Bhadra, credit expansion has almost come to a standstill. This is why deposits in banks and financial institutions are continuously increasing, and loanable funds are also accumulating.
As of last Saturday (29 Kartik), the total deposits in banks and financial institutions are 752 billion rupees. During the same period, the credit-deposit ratio (CD ratio) of banks and financial institutions is 74.31 percent. According to the instructions of the National Bank, banks and financial institutions are allowed to lend up to a maximum of 90 percent of total deposits. The total credit flow of banks and financial institutions during the same period is Rs 5.6 trillion.
Based on the aforementioned data, banks and financial institutions have a loanable amount (excess liquidity) of Rs 1.1 trillion in mid-Ashar. However, banks and financial institutions must keep 20 percent of their total deposits in cash in the bank. When all banks maintain liquidity at a rate of 20 percent, the amount spent is equal to about one percent of the CD ratio.
Although banks and financial institutions are allowed to maintain a CD ratio of up to 90 percent of deposits, they are allowed to go up to 89 percent because they have to maintain 20 percent liquidity. Even based on these facts, experts say that banks and financial institutions have a loanable amount of about Rs 1.0 trillion in the financial system as of 29 Kartik.
