Banks brace for interest rate war

KATHMANDU, June 11: Following intense pressure from member banks, Nepal Bankers Association (NBA) has decided to ditch its ‘gentlemen’s agreement’ on capping the fixed deposit interest rate at 11 percent.

The decision of the NBA - the umbrella organization of 28 commercial banks - comes in the wake of rising complaints from banking executives about the violation of the agreement. Following a discussion among its members on Sunday, the NBA decided not to continue with the ‘gentlemen’s agreement’ on capping the fixed deposit interest rate at 11 percent and savings interest  rate at eight percent. 

After the decision to scrap the interest rate cap which was widely criticized as an attempt at ‘banking cartel’, some banks announced an increase in their fixed deposit rates. 

For example, NIC Asia Bank Ltd, which had earlier faced the wrath of the NBA for violating the interest rate cap, published a new fixed deposit (of one year) rate of 12 percent, up from the earlier rate of 11 percent. Similarly, Civil Bank Ltd also raised its fixed deposit  (of 222 days) to 12.22 percent while it increased the savings rate to 10 percent. 

Bankers say that the NBA decided to allow the member banks to fix their interest rates by removing the cap as many banks were already violating the cap by secretly offering higher rates.
“There were a lot of complaints with proofs even in the Viber group of bankers that some banks were offering higher interest rates than the cap. Since many were already breaching the cap, why should others still follow it. Thus, the cap was removed,” said an executive member of the NBA.  
The decision to scrap the ‘gentlemen’s agreement’ and immediate announcement by two commercial banks to jack up their deposit rates indicate that the banking industry is bracing for an interest rate war.

Earlier in the first week of March, the NBA had enforced the interest rate cap among its members amid fierce competition among banking institutions to attract deposits by offering higher rates. After NIC Asia Bank Ltd breached the cap and offered 13 percent interest on one of its fixed deposit products, the NBA quickly instructed its members not to carry out any inter-bank transactions with the bank. The bank which was ostracized by other commercial banks later withdrew the product. 

The decision to fix the cap was criticized by the World Bank as an ‘anti-competitive’ behavior. “Feeling squeezed by the credit to core-capital-cum-deposit (CCD) ratio limit, some banks’ attempts to attract new deposits by offering higher rates in excess of 10 percent have been curtailed by the Nepal Bankers’ Association,” read the Nepal Development Update of the World Bank released on April 17. “This is a clear example of anti-competitive behavior by coercing banks to maintain interest parity among themselves,” the report added. 

As many commercial banks are yet to see an ease in their liquidity position, they are under pressure to woo fresh deposits.

“The deposit level has not increased to an extent that eases pressure on CCD ratio of many banks due to mismatch between deposit and credit growth. This will put an upward pressure on interest rates,” said Bhuvan Dahal, the CEO of Sanima Bank Ltd, referring to the prudential lending limit set by the Nepal Rastra Bank (NRB). A bank cannot float 80 percent of their total deposit and core capital as loans. He says that the rise in the deposit rates would eventually increase the lending rate of banks. 

“Some banks are raising deposit rates. Other banks are likely to follow suit even to retain the existing deposits if not to lure new savings,” he added. 

 
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