Bankers divided over continuing interest rate cap

Published On: November 19, 2018 10:55 AM NPT By: Republica  | @RepublicaNepal

Agree not to bid for matured institutional deposits of another bank

KATHMANDU, Nov 19: Some CEOs of commercial banks have stood against the decision of the Nepal Bankers’ Association (NBA) to cap interest rates on fixed and saving deposits.

Contending that the cap was costing them dearly, they have reportedly called for scrapping the cap altogether.

Under a ‘gentlemen understanding’ of the NBA, commercial banks are not allowed to offer more than 11 percent interest rate on fixed deposit and seven percent on savings.

Stating that the cap was draining their deposit stocks as the Nepal Rastra Bank bars banks from providing interest rate on call deposit higher than the minimum saving rate, they have said that such ‘gentlemen agreement’ should be now removed.

“Some small commercial banks have said that their deposits were being withdrawn by institutional depositors as interest rates have now become equal with bigger banks,” said a CEO who was present in the meeting. “They said that they want to discontinue with the cap. But, at the end of the meeting, there was a decision to stick with the cap at least for a week,” he added.

Following differences among bankers over the cap, the meeting agreed that commercial banks shall not compete on institutional fixed deposit of another commercial bank which matured recently.

“The NBA will try to find solution to the current problem with the help of the Nepal Rastra Bank. Until that time, bankers have agreed not to compete for institutional fixed deposit of another bank. This will enable the same bank to renew the matured deposit and that bank will not lose its fund,” said the banker.

The shortage of lendable fund is likely to persist as banks continue to face mismatch in lending and deposits growth. Slow growth in deposits in the banking system has been attributed to poor government spending.

As the credit to core capital plus deposit (CCD) ratio of almost all banks is nearing the upper limit set by the central bank, their lending capacity is weaning. While the demand for credit is soaring, the stock of deposit of banking institutions has not increased much.

The maximum limit for the CCD ratio -- a prudential lending limit -- set by the central bank is 80 percent. This means that a bank cannot lend more than 80 percent of its total deposits and core capital combined. The average CCD ratio of commercial bank is said to be at 77 percent.

Aggressive lending approach pursued by banks has also been blamed for the asset and liability mismatch in banking institutions. 

Amid skyrocketing interest rates, the NBA has decided to cap the deposit rates, arguing that such cap will help in preventing the adverse impact on the economy from higher borrowing costs. However, the decision received widespread criticism, with many viewing the attempt as interest rates cartel.

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