‘Monetary policy needs to address lending rates’

Kathmandu, June 24

As Nepal Rastra Bank (NRB) has been drafting the monetary policy for next fiscal 2018-19, there is expectation that the central bank will intervene to curtail the high lending rates, which is considered a major obstacle for private sector growth.

The central bank has been collecting suggestions from various stakeholders for the monetary policy so that it can address the broader issues and almost all the stakeholders have suggested the central bank to address the high lending rates.

Recently, Nepal Bankers’ Association suggested the central bank to cap the call deposit rates at the same level of the interest rate on government securities that the NRB provides to the banks. Capping call deposit rate at the level of the treasury bills rate is expected to bring down the base rate of the banks as the unhealthy competition among banks to woo institutional deposits through high call deposit rates will come to an end.

According to Bhuvan Kumar Dahal, CEO of Sanima Bank, this measure will help stabilise the deposit rates to some extent. Weightage of the call deposit on the total deposit of the banks stands at 10.3 per cent. There is a trend at present among institutional depositors to bargain with the banks for higher rates on deposits and they have been transferring their funds from one bank to those that offer higher rates.

Banks that are facing a crisis of funds to maintain credit to core capital plus deposit ratio or those that have loan
demands at high rates resort to the option of call deposit with such institutional depositors, who are always looking for high rates without keeping funds in fixed deposits.

The monetary policy  of the current fiscal had introduced a provision that the interest rate on savings deposit must be at the level of call deposit. Due to this provision some banks have raised the interest rate on savings deposits to attract call deposits. And almost all banks have done the same to retain the depositors and also to woo other depositors.

General savings deposit has 35 per cent weigthage in the total deposits of the banks. As the interest rate on savings deposit must be no less than call deposit, this has caused an impact of around 45.3 per cent on the deposits, as per Dahal.

The volume of call and savings deposits is almost equal with fixed deposits, in which banks normally offer high interest rates. As a result, interest rates on deposits and loans have increased in an unsustainable manner. Banks have been arguing that this must be corrected or else it could adversely affect the financial stability of the country.

However, the central bank may not consider this idea of the bankers as it believes that the interest rate should not be kept in a controlled regulatory regime. “The problem that we are facing is due to lack of funds and this is why the monetary policy will introduce policy measures to encourage the flow of funds of banks to the formal sector,” a high-level official of NRB told The Himalayan Times. “We actually cannot address this issue through tools that we introduce through the monetary policy like capping interest rate on call deposits at the level offered on T-bills and others.”

The NRB has said that the gentleman’s agreement made by the banks to keep the interest rate on savings and fixed deposits at seven per cent and 11 per cent, respectively, is a sign of ‘financial repression’, which could cause flow of credit to the informal sector where returns are high. The central bank believes that this move of the bankers could become an obstacle in encouraging banks to flow credit to the formal sector and towards the needs of the government as sought by the fiscal policy to achieve high growth.

NRB is preparing to bring the monetary policy next week after analysing whether or not the budget of all the three tiers of the government complement each other, according to central bank officials.