Kathmandu, October 21
The agreement between commercial banks to cap the deposit rate some 10 days back just before the Dashain vacation has received public criticism as they have put a cap on the money that depositors could have earned.
Bankers have taken this step several times in the past despite the mounting criticism against the ‘cartel-like’ system.
According to Nepal Bankers’ Association (NBA) — umbrella network of class ‘A’ banks in the country — the agreement was done following the consent of Nepal Rastra Bank (NRB).
NBA had taken the decision to cap deposit rates at the quarter-end citing that some banks have started facing high stress and a situation of financial turmoil could occur. However, some banks are not very happy with NBA’s decision to cap deposit rates.
One of the bankers, requesting anonymity, said that a dozen banks out of 28 commercial banks control the deposit rates. “Some banks, which were facing a tough time to retain deposits decided to cap the deposit rates when the rates started rising and the central bank has been serving their interest,” said the banker.
According to Anal Raj Bhattarai, financial sector analyst, the hypothesis of capping deposit rates is to bring down or at least stabilise the lending rates. However, lending rate has been going up. Commercial banks will publish their unaudited financial statements of the first quarter shortly, which will present the increased base rate of the banks, according to bankers.
“There has been a mismatch in credit expansion and deposit collection. Credit expansion is almost two-fold of the deposit collection in the first quarter, which is the root cause of the problem behind this financial fiasco,” as per Bhattarai.
The central bank had asked the banks to submit a plan of deposit collection and credit mobilisation from this fiscal, taking lessons from the experience of the huge mismatch in deposit collection and credit mobilisation in the last fiscal. Authorities from the central bank have said that the situation of credit crunch could recur in this fiscal as well if the banks are not disciplined in deposit collection and credit mobilisation.
Governor of NRB Chiranjibi Nepal, has been repeatedly saying that the central bank will supervise credit expansion and deposit collection based on the plans submitted by the banks. However, bankers have said that credit has been mobilised looking into the possible increase in government expenses and increasing remittances. This means that NRB has not properly reviewed the plans submitted by the commercial banks.
The slow growth of deposit against rapid credit expansion has pushed the banks into stress to maintain the credit to core capital plus deposit (CCD) ratio. Banks have to maintain CCD ratio at 80 per cent as per the regulatory requirement.
Experts have advised the banks to fix an optimum level of lending rate. The base rate that banks mandatorily need to
publish every quarter is not sufficient to stabilise the lending rate. “If NBA can make an agreement on interest rate for depositors, reportedly, for the sake of borrowers, why cannot they cap the lending rate at a certain level?” questioned Khomraj Kharel, secretary at the Nepal Economic Association.
Kharel further said that if the NBA fixes the upper ceiling of the lending rate on various loan products like production sector, real estate and housing and automobiles, among others, then borrowing rate will be more predictable. According to Kharel, predictable borrowing rate is fundamental for making investment decisions. “An investor does not see viability of business when lending rates are highly unpredictable,” he reiterated.
Commercial banks had decided to keep fixed deposit rate at 10 per cent and 10.5 per cent for institutional depositors and
individuals, respectively, on October 11. The new threshold for interest rate on fixed deposit is 0.5 percentage point lower than the rate on fixed deposit schemes agreed between NBA members last fiscal.
The post Banks should cap lending rates too appeared first on The Himalayan Times.
Written by Nikki Hamal
This news first appeared on https://thehimalayantimes.com/business/banks-should-cap-lending-rates-too/ under the title “Banks should cap lending rates too”. Bolchha Nepal is not responsible or affiliated towards the opinion expressed in this news article.
