Kathmandu. Although the number of deposits in banks and financial institutions has increased, their structure has started changing.
As the interest rates continue to fall, the attractiveness of savers keeping money in fixed deposits has weakened. As the interest rate difference between fixed and ordinary savings accounts narrows, instead of renewing the maturity fixed deposits, the general public has started keeping the money in ordinary savings accounts.
According to the data of the Nepal Rastra Bank, the share of fixed deposits in the total deposits of banks and financial institutions has been limited to 34.7 percent as of mid-August 2083. This share was 47.9 percent in the same period of the previous year. The share of fixed deposits in the total deposits decreased by 13.2 percentage points in a year.
On the contrary, the share of ordinary savings accounts has increased significantly. The share of savings accounts has increased from 38 percent in August 2018 to 48 percent in the same period of the current financial year.
Similarly, the share of current accounts has also increased from 5.8 percent to 7.5 percent. This shows that not only the size of deposits in the banking system but also the tendency of savers to keep money is changing.
The total deposits in banks and financial institutions stood at Rs 8.349 trillion as of mid-August 2018. Deposits increased by Rs 72.80 billion in the first two months of the current fiscal year. Deposit growth was limited to Rs 32.86 billion in the same period of the previous fiscal year. On a year-on-year basis, total deposits increased by 14.4 percent.
The decrease in the share of fixed deposits indicates that the savers have started prioritizing the interest rate and the liquidity of their money. The additional interest earned by keeping money in fixed deposits for a fixed period of time should be attractive compared to a normal savings account. However, when the difference between the interest rates is low, it has become an easier option for the savers to keep the money in an account that can be withdrawn as per the requirement rather than keeping the money tied up for a fixed period.
The main reason for this change seems to be the decline in the interest rate of banks. The weighted average interest rate on deposits of commercial banks has come down to 3.11 percent in the month of August 2008. The rate was 3.96 percent in the same period of the previous year. The deposit interest rate of development banks has come down from 4.58 percent to 3.48 percent and that of finance companies has come down from 5.73 percent to 4.04 percent.
The base rate of banks has also come down significantly. The average base rate of commercial banks is 4.70 per cent in mid-September. Last year, the base rate was 5.72 per cent. The base rate of development banks has come down from 8.09 per cent to 6.15 per cent and for finance companies from 8.77 per cent to 6.72 per cent. The interest rate on loans has also come down to 6.38 per cent in commercial banks, 7.67 per cent in development banks and 8.47 per cent in finance companies.
The fall in interest rates has created opportunities for borrowers on the one hand and reduced the returns that savers get from deposits on the other. Even if inflation is adjusted, there is a risk that real returns will be low or negative.
In such a situation, the possibility of investing in other areas may increase than the income earned by keeping money in the bank. Therefore, the interest rate of deposits falling drastically can become a long-term challenge for the financial system.
On the other hand, the share of institutional deposits in the total deposits in the bank has also decreased. The share of institutional deposits has come down from 35.2 percent in August 2082 to 33.3 percent in August 2083. This shows that the comparative role of individual and other deposits has increased.
With the change in the deposit structure, the sectoral situation of credit flow is also mixed. In the first two months of the current fiscal year, credit to the private sector increased by 1.7 percent in commercial banks, 0.6 percent in development banks and 1.4 percent in finance companies. However, credit to agriculture sector declined by 2.2 percent and finance, insurance and real estate by 4.7 percent.
Of the total loans of banks and financial institutions, 62.8 per cent is based on real estate collateral. The share of loans issued against current assets is only 15.6 per cent. This shows that the lending in the banking sector is still focused on fixed assets.
There is a need to use the current situation where interest rates are low as an opportunity to expand investment. However, cheap interest rates alone are not enough.
If the investment environment in the private sector, business confidence and demand for credit in the productive sector do not increase, then the liquidity available in the deposits will not be transformed into the production of the economy and the expansion of employment as expected. If the government can also increase capital expenditure on infrastructure and development, the economy will be able to take advantage of the low interest rates.
