Bankers revive call for scrapping interest spread cap

Published On: July 1, 2016 08:43 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, June 30: Bankers have revived calls for scrapping five percent interest spread that Nepal Rastra Bank (NRB) imposed on bank and financial institutions (BFIs) in Fiscal Year 2013/14.

The interest rate spread generally refers to the difference between the rate of deposits and the lending of BFIs. The central bank has made it mandatory for the BFIs to put such spread below five percent. 

While BFIs vehemently opposed the plan in the beginning, the relaxation provided later by the central bank on the calculation of spread had persuaded BFIs to implement such measure. 

However, bankers are now renewing their demands for scrapping the interest spread altogether ahead of the introduction of Monetary Policy for Fiscal Year 2016/17 by the central bank.

"It would be better if the central bank scrapped the five percent interest spread that it has enforced on bank and financial institutions," Anil Keshary Shah, vice president of Nepal Bankers Association, speaking at an interaction organized by the NRB to collect suggestions from stakeholders in the upcoming monetary policy. "If market is allowed to set the interest rate, it would be more sustainable and there would be more innovation," he added. 

The umbrella organization of the bankers from commercial banks also said that the directed sector lending made mandatory by the central bank should be gradually phased out.

Speaking at the interaction, investors and industrialists demanded revision on requirement of consortium loans for credit worth more than Rs 500 million. However, bankers said that such revision would be against prudential banking regulation. 

"There is a provision of forming a consortium of banks to borrow more than Rs 500 million.

This is a very low amount. As this affects those who want to borrow and make investment in mega projects, this requirement should be revised," Hari Bhakta Sharma, president of Confederation of Nepalese Industries, said.

However, Sashin Joshi, CEO of Nabil Bank Ltd, said that the requirement for consortium financing should be brought down to Rs 250 million instead. “What is happening in practice is that if a borrower needs Rs 250 million, such borrower has been borrowing the credit of single borrower limit from four/five banks. This type of practice can increase risk to financial stability," said Joshi.

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