Banks won’t be allowed to keep a difference of more than 5% on deposit rates

Published On: December 5, 2020 07:30 AM NPT By: Republica | @RepublicaNepal

KATHMANDU, Dec 4: Banks and financial institutions (BFIs) will not be allowed to keep a difference of more than 5 percent between the maximum and minimum interest rates on deposits.

The new announcement comes amid complaints that depositors and savers were suffering from low-interest rates as banks are providing returns on most of the deposit accounts lower than the inflation rate.

Nepal Rastra Bank (NRB) has announced a new provision in its first quarterly review of the monetary policy for the current fiscal year 2020/21 that will put a cap of 5 percent on interest rates that BFIs pay to their depositors on various deposit accounts.

Once the announcement is implemented through a circular, the spread on interest rates on deposit accounts, except call deposits, will not be more than 5 percent.

That means, for example, if a bank is offering a 9 percent interest rate on a fixed deposit account, the saving rate should not be below 4 percent.

NRB officials say that the new spread rate between the maximum and minimum deposit rates have been fixed to ensure that banks do not cut interest rates in a way that discourages savings or deposits.

“Banks are in a comfortable liquidity position, a good sign during this crisis. Lower interest rates as a result of liquidity surplus also boost the confidence of investors in the market. However, low-interest rates on deposits were also our concern,” said NRB Governor Maha Prasad Adhikari. “We have to make sure that depositors are not at a disadvantage,” he added.

Citing liquidity surplus amid slumping demands for loans, banks have not only lowered lending rates but also deposit rates.

Though lower interest rates have become a boon for borrowers, particularly investors, depositors were getting poor returns on their savings as banks try to protect their own margins.

Deposit rates have fallen to a level interpreted as the negative real interest rate.

Economists warn that depositors or savers are discouraged when they do not get interest rates higher than the inflation rate on their savings that they park in banks as deposits.

Most of the commercial banks have been offering interest rates of 2 percent on saving deposits in recent days compared to the inflation rate of 3.79 percent.