Stock investors turn to banks for higher yieldsStock investors who used to rush to banks to acquire loans to purchase shares are still rushing to banks, but for a different reason. This time, they are reaching out to these financial institutions to park their funds, as returns on bank deposits are surging.
Stock investors who used to rush to banks to acquire loans to purchase shares are still rushing to banks, but for a different reason. This time, they are reaching out to these financial institutions to park their funds, as returns on bank deposits are surging.
Many commercial banks now offer interest of around 12 percent per annum on fixed retail deposits, while interest on savings deposits has shot up to 8 percent from 2-3 percent in the recent past.
“These returns are quite attractive,” Narendra Raj Sijapati, managing director of Kalika Securities, said. “And many stock investors are diverting funds to commercial banks to minimise the risk, as volatility has grown in the secondary market.”
On Monday, the domestic stock market, which opened at 1,590.53 points, fell to intra-day low of 1,578.42 points within 45 minutes of commencement of trading. By the end of the day, the market had shed 9.97 points to close at 1,580.52 points, with all sub-indices ending in red. Also, transaction volume on the market plunged below Rs500 million.
Daily turnover at Nepal Stock Exchange (Nepse) stood at Rs498.89 million on Monday. The turnover was 50 percent less than in normal days. Currently, per day turnover at Nepse stands at over Rs700 million.
“There is very little demand for shares these days because deposit products of banks are becoming more attractive,” Sijapati said.
The market has been following bearish trend for the past few days, mainly after the formation of the government led by Prime Minister Sher Bahadur Deuba. Last Thursday, the market recorded the lowest transaction volume in the last three months. No wonder, the rush to the banks. Growing interest to park money in banks is expected to increase the deposit stock of banks, which are facing severe shortage of cash that could be immediately extended as loans.
Banks are currently short of cash because of mismatch in deposit collection and credit expansion since the beginning of the fiscal year in mid-July.
Deposit collection of commercial banks went up by Rs202 billion since the beginning of 2016-17 to Rs1,954 billion as of May 26, shows the latest report of the Nepal Bankers’ Association. In the same period, Rs278 billion in fresh credit was extended, raising credit portfolio of 28 commercial banks operating in the country to Rs1,664 billion.
Deposit collection has trailed behind credit disbursement since the beginning of this fiscal year because of deceleration in remittance inflow. All the while, demand for credit has been continuously going up since the almost five-month-long trade blockade imposed by India was lifted in the first week of February 2016. This is depleting the deposit stock at banks. Hence the competition to collect more deposits at higher interest rates.
Higher deposit rate is good news in a country like Nepal where consumption is pretty high, while savings have hit a rock bottom. The latest report of the Central Bureau of Statistics says Nepalis spend 89.75 percent of the gross domestic product on consumption. This means the country’s gross domestic savings hover around 10.25 percent of the GDP.
Higher deposit rate, therefore, is expected to inculcate savings habit.