Banks raise loan rates, Deposit rates go up too

Banks raise loan rates, Deposit rates go up too
eKantipur.com, 12-Feb-08
Krishna Regmi

The days of cheaper auto, housing, personal and other loans are, sadly, over.
Those who are planning to borrow and who have already borrowed must stand ready to fork out more money and readjust their financial planning.

The average lending rate in the banking sector has edged up by 1 to 2 percent, while interest rates on fixed deposits have gone up by 1 to 3 percent, said Radhesh Pant, president of Nepal Bankers' Association.

Nabil Bank has already raised the lending rate in consumer financing to 8 percent, up from 6.5 percent.

Anil Shah, chief executive officer at Nabil said, "To collect savings to match the rising demand for money, we have begun offering 6.5 to 7 percent interest rates on fixed deposits of six months and above."

It was 3 to 3.5 percent earlier. While the bank has revised fixed deposit rates upward, Shah said it will increase rates in other types of deposits gradually.

Borrowers have begun to feel the pinch. Sashi Tulachan, a resident of Tikhediwal, was arranging money to pay the first installment on an auto loan when she was notified that her installment has risen because of recent upward movement in the lending rate.

"To my surprise and dismay, I received a document from Nabil Bank, asking me to sign a new contractual agreement which raises my lending rate to 7.5 percent," she said. "I had just recently bought a vehicle with loan at 6 percent interest."

She said she felt unhappy, but signed the agreement as she did not have any other option. "Working people like me have to prepare financial planning in advance. Any abrupt change will impact my budget," she said.

The revision in interest rates is due to the growing liquidity crunch in the banking sector. Discount rate on 91-day treasury bills (T-bills) reached 6.16 percent at Monday's auction. It was just 2 percent last September. Another strong indicator of stretched liquidity is the rising inter-bank lending rate, which is hovering over 8 percent, up from 3.5 percent in mid-July.

Pant said the liquidity shortage will accelerate as Nepal Telecom and Nepal Electricity are issuing shares and bonds while Nepal Oil Corporation is also in the process of doing likewise, to raise over 14 billion rupees. "The days for cheap loans are certainly over," he said.

Sensing that a liquidity crisis may creep in, he said NBA has written to the central bank to take necessary measures to inject more funds into the banking system.

Nepal Rastra Bank has already injected over five billion rupees into the system in the past one month to stave off the liquidity crisis. On the impact of the economy, Pant said the rising interest rate would discourage capital flight.

"Likewise, it would encourage savings, which could be channelled toward productive investment," he said.