Banks' cost of fund declines, while interest rate spread widens
RUPAK D SHARMA
KATHMANDU, Aug 24: About a year ago, at the height of liquidity crisis, Lumbini Bank accepted long-term fixed deposits of up to five years at rates of up to 14 percent. State-controlled Agricultural Development Bank did the same, albeit for a period of up to three years and at rates of up to 11 percent.
The reason: these banks, which usually prefer to accept fixed deposits of up to a year, were anticipating the crisis to drag on for a few years.
They were wrong.
A year later, banks are again filled with cash as Nepalis working abroad are continuing to send money, lending to the speculative real estate sector has stopped and funds parked in development banks and finance companies have migrated to commercial banks owing to their weak fiscal compliance.
Unfortunately, even at a time when excess liquidity hovers at over Rs 40 billion and deposit rates have fallen down to an average of eight percent, Lumbini Bank and Agricultural Development Bank are still paying high interest on funds borrowed to create cushion.
Little wonder their cost of fund -- the price banks have to pay to use borrowed money -- went up in the last fiscal year that ended on July 15.
"Situation has certainly changed now. But at the peak of the crisis, we predicted liquidity shortage to continue for at least three to four years," Shovan Dev Pant, CEO of Lumbini Bank, told Republica, justifying the action taken around a year ago.
This miscalculation perked up the bank´s cost of fund to 9.24 percent last fiscal year, as against 9.18 percent in the previous year. Agricultural Development Bank, too, saw its cost of fund rise to 6.84 percent in the year, marking the highest increment of 16.13 percent among commercial banks.
Other newer banks like Civil, Commerz and Trust, Prime Commercial, Janata, Bank of Asia Nepal, Sanima and Sunrise, which still have not built a strong depositor base, also paid higher rates -- in the band of 9.30 percent to 10.52 percent -- to use borrowed funds.
"Our costs were on the higher side as some of the fixed deposits on which we´re paying higher rates are yet to mature," Narayan Das Manandhar, CEO of Prime Commercial Bank, said.
It is said 80 percent of the fixed deposits at banks have a life of one year. This means most of the depositors will either pull the money out of the bank after a year or renew them at rates revised by banks. But during the crisis, many banks, like Lumbini and Agricultural Development, accepted fixed deposits of more than a year´s tenure to ensure there is no shortage of cash. "So unless all these deposits are returned to clients, we will have to continue spending more money on serving interest," Manandhar said.
However, the situation was not the same across the board. Banks that already had enough cash or those that shied away from taking long-term position on fixed deposits managed to reduce cost of fund significantly. This included Standard Chartered Bank Nepal, which paid interest of 3.44 percent to use borrowed funds -- down 12.69 percent and lowest among commercial banks.
Established banks like Nabil also saw cost of fund plunge by 26 percent to 5.43 percent, while relatively newer Citizens was also able to borrow funds for 7.74 percent, marking a decline of 19.38 percent over a year´s period.
On average, cost of fund of 32 commercial banks dropped 3.4 percent to 8.07 percent last fiscal year, from 8.36 percent in the previous year, unaudited financial reports of banks show. This means banks on average paid 8.07 percent interest on cash they used.
Banks probably would have received praise had they reduced lending rates as well, but their inability to do so widened the interest rate spread last fiscal year.
On average, rate spread of commercial banks expanded to 3.70 percent in the period, from 3.57 percent recorded in 2010/11, reports of 25 banks that disclosed the figures show.
Among these, the worst was Nepal Bank, which maintained interest rate spread of 6.19 percent. This means the difference between deposit and lending rates at the state-owned bank was at least 6.19 percentage points last fiscal year.
The spread of Nepal Bangladesh Bank and Nabil Bank were also on the higher side, standing at 5.34 percent and 5.01 percent, respectively, whereas Machhapuchchhre Bank maintained the narrowest spread of 1.46 percent.