Borrowing cost likely to climb as deposit dips amid rising credit outflows

By Ajay Chhetri, Kathmandu, Aug 9: The borrowing cost is likely to climb further as deposit in commercial banks has significantly dipped amid an upward trend of credit outflow.

The data released by the Nepal Bankers’ Association (NBA) showed that the deposit dwindled by Rs 32 billion while credit outflow slightly rose by Rs 1 billion between 22 July to 5 August.

All the rates of borrowing already started picking up as the pressure emanating simultaneously from the accommodative stance on money supply and drying up surplus liquidity mounted up.

Surplus liquidity fluctuating around Rs 17 billion on daily basis is far lower in comparison to Rs 150 recorded in mid-July of the fiscal year (FY) 2021/22. The repercussion of tight liquidity culminated in the interbank interest rate hike which consequently raised the discounting rate of Treasury bills (T-Bills) and repo rates.

Interbank interest rate which is set as benchmark for the open market operation of Nepal Rastra Bank (NRB) to anchor policy rates within interest rate corridor (IRC) is already at its tipping point with 8.50 per cent as of August 9 up from 7 per cent seen just two weeks ago.

The elevation in the interbank interest rate triggered bidding rate of T-bills to hit 14 per cent during its renewal auction on July 26. Similarly, the bidding rate of repo hiked to the weighted average of 8.38 per cent on July 28. 

With regard to the rising T-Bills rate, NRB deputy spokesperson, Narayan Prasad Pokhrel, said that banks and financial institutions (BFIs) are liable to hold a certain portion of government bond. So they are compelled to renew the T-bills although the discounting rates are heating up.

Despite NRB directives to the BFIs to recalibrate their interest rates as policy rates get changed, the NBA concluded to keep the interest rate static for now.

Meanwhile, the repo rates already crossed policy rate. To cool off heating interest rates, NRB injected 7-days repo of Rs 30 billion on July 28 at weighted average 8.38 per cent interest rate. In this scenario, the anticipation of rising borrowing costs further cannot be ignored as deposits clumsily have fallen.

Pressure of rate hike is robust as the NRB is carefully moving forward while injecting liquidity to ensure the curbing runaway inflation. Therefore, it has renewed T-bills of Rs 23 billion whereby the NRB purchased of Rs 16 billion, and BFIs purchased of Rs 16.61 billion to retain liquidity. While just Rs 10 billion is repaid by the government.

So, the rise in the repo rate could pull the cost of borrowing higher while the NRB stands compelled to take an accommodating stance to curb inflation.