Bankers reluctant to bring down lending rates

Published On: October 13, 2018 09:00 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, Oct 13: Though the Nepal Bankers Association (NBA) has decided to lower the cap for commercial banks on deposit rates, banks have shrugged off any suggestion to reduce their lending rate immediately. 

The deposit rates are going down, albeit slowly, but nevertheless, banking institutions have been reluctant to bring down interest rates on their loans. Bankers suggest waiting until second quarter to make any revision in their lending rate. 

Following the news reports on the NBA’s decision to reduce the cap on deposit rates, leaders of the business community have urged bankers to take initiative to bring down their lending rates. 
While bankers have been saying that the lending rates are unlikely to go down at least before the second quarter, they have already reduced their interest rates by 50 basis points, or 0.5 percentage points, on deposits. 

This new decision of the NBA means that a commercial bank will not be allowed to offer more than 10 percent per annum on fixed deposit to any institution while such ceiling is set at 10 percent to individual depositors. 

Because they will be now paying less to depositors, their interest expenses will also come down. This is one of the main reasons, business leaders mention, to be behind the bankers’ rush to lower the cap on deposit rates. However, the NBA has not taken any step toward reducing the high lending rates that are crippling businesses.

The lowering of the deposit cap comes in the wake of the increase of deposits which is a predominant source of funds for banks to extend as loans and investments. But, instead of disbursing loans in line with their deposit growth, banks are once again showing aggressive lending practice like in the previous year, according to the data of NBA. 

According to the NBA, banks have added Rs 40 billion in new deposits in the last first two and a half month while their lending rose by Rs 97 billion in the same period. 

Business leaders say that the reluctance to lower lending rate but making decision collectively to reduce deposit cap rate highlight their motive that they are concerned only with their profit even at the expense of their clients. 

Businessmen say that they have to pay up to 18 percent of interest rates on bank loans.
“If banks make agreement to lower deposit rates, the high interest rates on loans should be also brought down,” said Pashupati Murarka, immediate past president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). 

“The decision to reduce deposit rate cap that brings their cost without lowering lending rate is only aimed at increasing their [banks’] profits. They want the same return rate for their shareholders now as it was when their paid-up capital was Rs 2 billion,” added Murarka, referring to the rise in the paid up capital of each bank from Rs 2 billion to Rs 8 billion in the last four years. 

However, bankers say that lowering the cap of the deposit rate eventually puts downward pressure on lending rate. 

“The association cannot do everything. We lowered the cap on the deposit rates which would help in reducing the deposit cost and base rate of banks. This means lending rate will go down after some time and loans will become cheaper,” said Gyanendra Dhungana, the NBA president. 

He defended the decision on capping deposit rate. “The agreement among banking institutions will help to curb unhealthy competition to raise interest rates and repeat the same behavior of bankers observed in the last fiscal year,” he said. “We can hope the lowering of the deposit rate will get transmitted on lending rate by the second quarter of the current fiscal year,” he added.

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