Kathmandu. The investment strategy of institutional depositors within the Nepalese banking system is now witnessing rapid changes. Large institutional depositors, who had opted for short-term instruments such as government treasury bills with the expectation of raising interest rates a short time ago, are now shifting again to long-term fixed deposits.
According to bankers, such a strategic turn has come when interest rates have started falling and the return from short-term instruments is certain to decrease. According to them, institutional bodies such as insurance companies, provident fund, citizen investment fund, social security fund have started giving priority to fixed deposits in search of stability again.
The pressure on banks to reduce interest rates has increased as liquidity has increased. In the same situation, institutional depositors have again turned to the protective and stable income of fixed deposits, believing that the expected benefits from the short-term instrument cannot be obtained.
With the reduction in interest rates, deposits worth more than Rs 270 billion have been added to commercial banks at the end of the last financial year. This growth rate is considered to be much higher than normal.
According to banks, institutional depositors have started returning directly to fixed deposits after maturity of short-term investments. Their priorities are now limited to a period of one year. Which has started challenging banks in long-term capital management.
According to bankers, institutional depositors first went to short-term treasury bills in anticipation of interest rate hikes. However, as liquidity increases, such possibilities have weakened and they have moved back to the term. This has led to an unprecedented increase in deposits in the month of June. ’
Remittances can be seen as another major factor in the rate of interest decline. In the 11 months of the last fiscal year alone, remittances worth Rs 1,532 billion have entered Nepal. This amount has added to the liquidity within the banking system. It is unlikely that interest rates will go up immediately.
On the other hand, bankers say, “When there is plenty of liquidity in the market, banks do not lack funds. This reduces the need to pay higher interest rates on deposits. Therefore, if long-term investment is not attractive, institutional depositors are forced to be limited to fixed plans of one year or less. ’
Banks are looking for long-term deposits for long-term lending. However, in the current scenario, institutional depositors are not willing to keep money in long-term funds due to low interest rates. This has made it difficult for banks to balance asset-liability matching. Both cash management and profitability of banks can be affected if the loan tenure is long but the deposit remains only for a short period.
Interest rate fluctuations, liquidity flows and internal strategies of institutional depositors have profoundly altered the structure of deposits in the banking system. Experts say that this trend will force banks to change interest rate strategy, lending policy and resource management strategy in the coming days.
