Say new provisions in monetary policy review will send interest rates out of control
KATHMANDU, Feb 21: Nepal Bankers Association (NBA) has opposed several key provisions introduced by the Nepal Rastra Bank (NRB) through the mid-term review of the Monetary Policy for Fiscal Year 2018/19.
Warning that some of the provisions introduced in the mid-term review report will make ‘adverse impact’ in banking sector, the NBA – the umbrella organization of commercial banks – has urged the central bank to hold needful consultations with stakeholders and revisit such measures.
After a full house meeting with its members on Wednesday, the NBA issued a six-point statement expressing its disagreements over five key provisions introduced by the central bank in the mid-term review.
Earlier on Monday, the NRB published its mid-term review report introducing some new provisions and revising existing provisions in the Monetary Policy for the current fiscal years. The new measures were mainly aimed at checking high interest rates of bank and financial institutions (BFIs) and increasing flow of lendable funds for the private sector.
Revised interest rate corridor system introduced
While private sector has been piling pressure on banks to lower lending rates, the NBA has argued that there has been a gradual correction in interest rates in recent months. “Since some of the points included in the mid-term review will cause uncontrolled rise of interest rates, the association holds the view that the interest rates, charges and other rates should be left to the market as per the international market norms and open market economy,” read the NBA’s statement.
The major opposition of the banking executives seemed to be on the announcement to revise the existing formula to calculate interest rate spread by including the average weightage interest rates of deposit and lending. Once the formula is enforced, banks will no more be allowed to consider the return on investment. Currently, banks are required to maintain the interest rate spread of 5 percent and such spread has to be reduced to 4.5 percent by mid-July.
“It will become difficult to maintain the cost for the banking sector if the return on investment is suddenly separated from the average spread calculation method at a time when the existing requirement to bring the spread to 4.5 percent from 5 percent is in place,” the NBA said in the statement.
According to banking executives, any revision in spread formula is likely to crimp their profit as the margin between interest rates on deposit and lending rates should be narrowed down according to the new formula.
The central bank’s move to review the formula comes at a time when the private sector has been agitating to bring down the cost of borrowing.
Also, the NBA has also said that the new measure to bring the share of call deposit to total deposit below 10 percent should also be reviewed as it could prompt ‘unhealthy competition’ and uncontrolled rise of deposit rates.
Similarly, the NBA has stood against the central bank’s decision to fix maximum premium that a bank can charge on lending rate. Though the central bank is yet to decide on the cap of such premium rate that is levied on base rate for determining lending rates, the NBA said that the central bank should allow banks to decide it on their own.
