NRB's Consultative Document on Interest Rates

Bankers oppose NRB proposal on floating interest rate loans

Published On: March 23, 2017 01:00 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, March 23: Bankers have said that it was not possible to follow a new rule proposed by the Nepal Rastra Bank (NRB) that will prohibit them to revise interest rates on floated loans more than twice a year. 

Responding to a consultative document entitled 'Provisions Related to Determination and Review of Interest rates' floated for discussion by the central bank, the Nepal Bankers Association (NBA) has decided to urge the central bank to revise the proposed provision that bars them from adjusting interest rates on floated credits more than twice a year. 

Talking to Republica, NBA Vice President Kishore Maharjan said that the association was preparing to send its written suggestions on Thursday based on a discussion that it held on Wednesday with executives of its member banks.

The umbrella organization of 28 commercial banks has also decided to suggest to the central bank to incorporate a measure that would allow them to revise interest rates on floated loans by giving a 30-day advance notice to borrowers.

Maharjan also argued that the provision of not allowing banks to adjustment interest rates more than twice a year would compel banks to charge higher rates while sanctioning loans. “Since rates are revised based on the cost of our funds and interest rate that is provided on deposits, the restriction to revise rates, if enforced, will compel banks to quote higher rates on loans beforehand,” Maharjan, who is also the CEO of Civil Bank Ltd, said.

Speaking at the discussion, some bankers reportedly expressed worries over the central bank's 'micro management' of banks.  Some bankers said in the meeting that interest rates should be allowed to move based on the free market theory, a banker said requesting anonymity.

Maharjan said that the NRB's provision on interest rates adjustment can be implemented only if the central bank ensures money supply to BFIs at a fixed cost. “But such solution is not possible. So, the best way out is to allow banks to adjust lending rates whenever it is necessary by giving borrowers 30-day notice in advance. Otherwise, it will ultimately affect borrowers as banks will be compelled to charge higher rates while signing loan agreement to offset any possible losses in the future due to rise in cost of fund,” he added. 

Amid growing complaints that the BFIs raise interest rates on floated loans haphazardly, Nepal Rastra Bank (NRB) has proposed a new measure that will prohibit lenders from raising such rates more than twice a year. 

While Development Bankers Association, Nepal (DBAN), is yet to formally come up with its feedbacks, its president Krishna Raj Lamichhane told Republica that development banks are also of the view that such a provision won't be practical. “We don't say that banks should be allowed to revise interest rates on extended loans frequently. However, our market is very unpredictable and interest rates can swing very fast. So, rate revision after six months as proposed by the NRB is a long period,” said Lamichhane, who is also the CEO of Kailash Bikas Bank Ltd. He also said that the proposed requirement to give advance notice of 45 days to borrowers while revising rates was also very lengthy. 

According to Lamichhane, DBAN is holding a meeting on the central bank's consultative document on Thursday. 

The document, which has been floated for discussion and consultation, last Thursday, among others, prohibits BFIs from making adjustment on the interest rates of floated loans to the borrowers except than on the 'prescribed' dates which should not be more than twice than a year.  However, BFIs will not be allowed to change the interest rate before six months of loan sanctioning. Similarly, the central bank has also said that it would not allow banks to increase interest rates more than the overall rise in the cost of funds of the BFIs or their staff and operating cost. 

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