July 15: Banks and financial institutions (BFIs) have stepped up measures to increase fixed deposits in recent times due to the lack of liquidity (investable capital) seen in the financial sector.

The share of fixed deposits has increased after the banks started attracting general public by announcing higher interest rates.

According to the data of Nepal Rastra Bank, as of June in the current fiscal year, the share of fixed deposits out of the total deposits of Rs 49 trillion 85 billion in banks and financial institutions has climbed to 57.1 percent. Until a year ago, the share of fixed deposits was 48.5 percent.

Depositors are attracted to term deposits due to high interest rates and other facilities announced by banks to increase deposits due to the lack of liquidity in banks. Banks pay 5 percentage points more on term deposits than on ordinary savings. As per the NRB directive, the difference between the maximum and minimum interest rates on all types of deposit accounts other than call deposits cannot be more than 5 percentage points.

Due to the intervention of the NRB in the interest rates of banks and financial institutions and the consent of the Nepal Bankers Association, the umbrella organization of the banks, BFIs have attracted the general public to term savings.

As a result, the share of ordinary savings and current deposits has decreased, and fixed deposits have increased. In June 2020, current account deposits were 10 percent but in May 2022, they fell to 8.8 perecnt. Similarly, ordinary savings have dropped from 31.9 percent to 27.1 percent.

After the banks raised the interest rate to 12 percent, the NRB intervened last October and directed them to set a single-digit limit. At that time, the central bank had also issued a directive not to reduce interest rates by more than 10 percent. Since then, umbrella organizations of banks and financial institutions have agreed to keep the interest rates stable.

According to the instructions of the NRB, despite increasing the interest rate by 10 percent in February, it is implementing a gentleman's agreement not to increase the interest rate in March, April, May and June since the deposits did not increase. The association has already decided to implement the same interest rate in June and July as well.

The Nepal Bankers Association has agreed that the commercial banks will give a maximum interest rate of 11.03 percent to individuals and 10.03 percent to institutions on 1-year term deposits.

As per the provisions of NRB, banks can provide an additional 1 percent on the deposits coming from remittance.

Anil Kumar Upadhyay, president of the Nepal Bankers Association, said that due to the interest rate, the deposit portfolio of banks has increased from current and savings to term deposits. He said that the interest rate on fixed deposits grew from 6 percent to 11-12 percent within a year.