KATHMANDU, Jan 22: Though there were expectations that interest rates on loans will fall at least by one percentage point from the third quarter, commercial banks have turned reluctant to lower their rates.
Instead, they have raised the premium rate by at least one percentage point thereby increasing the interest rate on loans to make up for the loss that they will incur from a reduction in base rate.
Banks charge an interest rate on loans by adding a premium on their base rate. Some say that banks’ are not lowering lending rates as a drop in interest rates could crimp their profits.
In an effort to lower skyrocketing interest rates, the Nepal Rastra Bank (NRB) on December 26 issued a circular, instructing bank and financial institutions (BFIs) to remove return on assets from the formula of the base rate calculation.
As banks were allowed to add 0.75 percent as return on assets in the formula, the removal of the ROA was expected reduce the base rate and ultimately lending rates.
“As the base rate is going to decrease, the central bank has allowed banks for one-time increase in their premium,” said Gyanendra Dhungana, the president of Nepal Bankers Association (NBA). “So, with the consent of the central bank, banks can raise their premium in the third quarter.”
He said that the base rate revision is less likely to lower lending rate in the third quarter.
While they have raised the premium for new borrowers, they have become reluctant to reduce the rate for existing borrowers, stating that they cannot revise rates for loans that were disbursed earlier.
The central bank’s objective of lowering credit rate through revision of base rate formula is less likely to be met. The NRB had revised the base rate formula in line with the recommendations made by a committee formed by the Ministry of Finance (MoF) to look into volatility of the financial markets in mid-December last year. NBA President Dhungana was also a member of the committee led by NRB Deputy Governor Shiva Raj Shrestha that provided the government 58-point recommendations.
Even the cap on the deposit rates by NBA for its member commercial banks have not helped in lowering interest rates in the third quarter.
Through a ‘gentlemen understanding’ of NBA, commercial banks have capped interest rate on savings at 6.5 per cent, individual fixed deposit at 9.25 percent, and institutional fixed deposits at 8.5 percent.