Nepal Bankers Association (NBA) has decided that its 27 member banks will suspend interbank transactions with NIC Asia Bank for breaching understanding on capping deposit rates.
NBA has said that NIC Asia, one of its 28 member banks, has been engaged in ‘risky behavior’, so other 27 banks do not want to take risk of doing transactions with it. NIC Asia Bank, however, terms the decision of cornering it for not following the decision of capping interest rates ‘unfortunate’.
Sagar Ghimire of Republica talked with Nepal Bankers Association President Gyanendra Dhungana and NIC Asia Bank Assistant CEO Roshan Kumar Neupane about the recent developments. Excerpts:
“We should not, and can not be a part of the interest rate cartel”
Why did you decide to breach ‘gentleman agreement’ on capping interest rates by the NBA?
There was nothing formal about the agreement on capping the interest rates among the commercial banks through the NBA. There was an informal understanding among banks at the NBA to cap the saving interest rates at 8 percent and fixed deposit interest rates at 11 percent. We later studied about the consequences of such interest rates cap imposed by the NBA and decided that we should not and cannot be a part of the interest rate cartel, concluding that keeping a lid on deposit rates is not going to help our depositors, clients and the economy. We think the cartel and syndicate in banking sector is wrong and interest rates should be allowed to move according to market theory. Banks cannot and should not curb competition in the market.
Now other commercial banks have decided not to do any interbank transactions with your bank. What is your comment?
I have heard about the decision of the NBA to exclude NIC Asia Bank for all kind of interbank transactions through news media. We have not received any formal notice. If this decision is true, this is very unfortunate. As people are borrowing money from Saahu Mahajan at interest rates as high as 36 percent, we should be able to bring those depositors to the formal banking channel. This is why we decided to move in line with the equilibrium rule. This is not something that an association of banks is supposed to do. We stand by our decision of raising the saving and fixed deposit rates which, we believe, is in favor of the public. We urge other banks and NBA to refrain from promoting unethical practices. Though the decision was made in haste, I hope that all banks will move ahead for the benefit of the banking industry. They will sooner or later realize it.
What impact will the decision of isolating your bank have?
This decision may create some inconvenience for us, but we can manage it. Suspending relationship does not create a big problem for us. We can get standing liquidity facility (SLF) from Nepal Rastra Bank (NRB) if we need liquidity. Yet, this is unfortunate that there is an attempt to impose syndicate openly. Our banking industry is a highly regulated sector. I do not think that the NRB -- our regulator -- will be a mere spectator of an organized effort of cornering a bank that is mobilizing a deposit of nearly Rs 124 billion.
Are you going to complain it with the NRB?
The NRB may intervene or take decision whenever it deems necessary. The time has not come for us to go seeking the intervention of the central bank at this moment. Since the NRB is a sensible regulator, they might be watching this episode. We believe that the NRB do not support any syndicate.
Has your CEO stepped down due to the bank’s breach of gentleman agreement?
There are also rumors that our CEO has stepped down due to this recent development. This is not true. As his term with the bank was coming to an end, he has decided to take leave. His decision to take leave has nothing to do with this development.
“We are afraid of doing transactions with NIC Asia”
Is NBA a regulator to take action against a commercial bank?
Due to NIC Asia Bank, the systemic risk in the banking sector has increased. The bank has started doing business in irrational ways. They are trying to achieve growth that is not possible. So, we said we cannot and will not do interbank transactions with that bank which can also expose us to various risks. Why cannot I say I am afraid to do business with a bank and I don’t want to give it a loan or I can’t do transactions with it? That is what we said through the NBA. You should look why the decision was required.
Don’t you think capping interest rate is a cartel?
The price of eggs, milk or gold is fixed by their associations. What do you say to them? We have to take certain decisions that benefit the economy. We have made an informal understanding that the interest rates should not exceed 11 percent for fixed deposit and 8 percent for savings. Basically, it’s not the new deposit that we see coming to the banking system from the interest rates war. This unhealthy competition of raising interest rates means one bank takes away deposit of another. Rise in deposit rates also means the rate of loan will increase which does not bode well for the economy since that may erode loan repayment capacity and lead to defaults. Our understanding of interest rates cap will remain unchanged for the time being.
But NIC Asia Bank officials say that it’s an interest rates cartel and it’s unfair to corner them just because they offered higher interest rates to depositors?
After we decided to not do business, they might have been ashamed and blaming us as running a cartel. We have given them numerous chances to correct their business and urged them to take steps to mitigate risks. See the recent SWIFT-related cyber attack on the bank. And when a CEO says that the bank should move ahead cautiously, he has to step down from the bank. This shows the real situation of the bank.
Wouldn’t it be better to ask the regulator to settle the issue rather than deciding on your own?
I don’t think we need to ask Nepal Rastra Bank if to decide that we, 27 commercial banks, will not carry out business with a risky bank. It’s our right to decide on whether to give loans or not after calculating risks. The NRB might be also observing this situation and may intervene when it thinks it needs to do. Our only aim now is to mitigate risk by not carrying out transactions with NIC Asia Bank. We will continue not doing transactions with NIC Asia until it reduces its risks and stops unhealthy practices.