Banks and financial institutions (BFIs) have been passing on their increased cost of funds caused by a prolonged liquidity crunch to their borrowers—both the general public and industrialists—in the form of higher lending rates. The interest rate on loans has doubled from 8 percent to 16 percent in the last one year. Realty developers said they were feeling the heat of increased interest rates being charged by BFIs. “The rate of interest that used to be around 7-8 percent has surged to 16 percent,” said Min Man Shrestha, general secretary of the Nepal Land and Housing Developers Association. According to him, the realty sector along with other industries have been suffering from the hike in interest rates. Bankers said the rising cost of funds had pushed up lending rates. The cost of funds for commercial banks has jumped to an average of 8.14 percent in the first nine months of the fiscal year. A year ago, it was 5.13 percent. According to Sashin Joshi, chief executive officer of NIC Bank, the cost of funds climbed due to sluggish growth in deposits besides a tightened liquidity situation. “With slow deposit growth affecting the liquidity position of banks, the inter-bank rate has increased to double digits in recent days,” said Joshi. “It’s the cost of funds that plays the major role in fixing the interest rate on loans,” said Parshuram Kunwar Chhetri, chief executive officer of the Bank of Asia Nepal. Bankers said that the cost of funds would increase further after they reduce the gap in interest rates between different savings accounts to 2 percent. Most banks are planning to cut the difference in interest rates to 2 percent from the next fiscal year following the central bank’s directives. “Once we implement it, our cost of funds will increase further,” said a banker. The financial reports of commercial banks for the third quarter shows that new banks are paying their depositors a higher rate of interest to mobilize funds. This has raised the cost of funds for new banks. “With the higher interest new banks are paying their depositors, their cost of funds is higher,” said Chhetri. Meanwhile, the net interest income (NII) of banks has surged 17.88 percent in the first nine months due to the higher rate of interest. By the end of Q3, commercial banks had registered an NII amounting to Rs 22.48 billion. Even though the NII has gone up, profit growth has taken a beating as banks are paying a higher rate of interest to mobilize funds. The cumulative net profit of commercial banks rose 4.65 percent to Rs 10.79 billion at the end of Q3. During the same period in 2009-10, the growth rate of net profits was 6.72 percent.
Source:thekathmandu post