The battle rages on

 An Increase in the deposit rates had to reflect the impact on the lending rates. This was nat­urally seen from late 2016, when the lending rates continued to grow in the same proportion as the deposit rates. This adversely hit the produc­tive sector. New investments, expan­sions and working capital—every­thing became dearer. The sector, through the apex business member­ship organizations, including FNCCI, CNI and the relevant sectoral asso­ciations lobbied with the Ministry of Finance and the central bank to introduce measures to mitigate the situation. The central bank issued repo time and again, but this hardly addressed the long-term liquidity needs of financial institutions. The battle for deposits raged on. The understanding between the commercial banks to put a ceiling on the deposit rates provided some respite to the competing financial institutions and the debtors. Still, the voracious need of new funds to manage the gap between the demand and supply forced finan­cial institutions to issue multi-year debentures with an average 10-plus percent return. This par­tially addressed long-term credit needs, primarily in infrastructure. But it did not bring down the base rate and cost of capital. The recent NRB directives put a sudden halt in financial institutions’ aggressive lending capacity.

This in turn eased the mandatory need of keeping credit to core cap­ital plus deposit ratio (CCD ratio) at 80 percent and below. CCD ratio below 80 percent means the finan­cial institution is in a comfortable position to extend money and is not desperate to collect deposits. The situation is assessed by the market as an early indication of bank rates cooling down in near future. While it usually takes a minimum of one fis­cal for any change in interest rates to be reflected in the macro economy, the secondary market’s response is immediate. As is reflected in the chart, the increment in bank rates played role in the market direction taking a southbound dive from late- 2016. The expected decline in bank rate is already reflected in the chart from December 2019.

The second quarter-end of the current fiscal brought more answers. Net profit has increased by 10.77 percent, which is below average growth in previous years and this might not be pal­atable to the market. Till the end of the second quarter, the industry average of distributable profit is in the red zone and earnings per share is stagnant, meaning the com­mercial banks have a tougher road ahead in the next two quarters. The positive signs are a slight decline in base rate, cost of fund and CCD ratio. This mixed result provides some hope for better liquidity while still not motivating institu­tional investors to aggressively enter the market.

As the banking and financial institutions are the backbone of the Nepali bourse and its financial reports are transparent and pub­lished on a regular basis, institu­tional investors feel comfortable with their traditional choice of long-term entries. As mentioned in previ­ous issues, as long as the BFI sector does not show a steady rise in the trading floor, the current eupho­ria might not have enough fuel to last long