On May 13, Republica reported the news and quoted bankers and senior officials of Nepal Bankers Association (NBA), who revealed the disturbing and flagrantly illegal term of the agreement, which limited deposit interest rate at 12 percent in all commercial banks. Banks and the NBA basically argued that such an agreement was necessary to deal with “growing competition among commercial banks” in attracting deposits by offering higher interest rates and also to check the interest rate on bank’s investment since once a bank takes deposit at a higher interest rate, it will be forced to invest such deposit at much higher interest rate, which might not be economically viable. However, such arguments have no merit and the said agreement was only a manifestation of greed, and utter disregard of consumer’s interest and prevailing laws of the nation.
It is very clear from the nature of the agreement, deposit interest rates of commercial banks since the conclusion of the agreement and NBA high officials’ own concession that the said informal agreement among commercial banks is a cartel agreement, which is prohibited and even punished under Competition Promotion and Market Protection Act 2007. At this point, it may be noted that Competition Law does not require the conclusion of a formal or a written agreement for the existence of a cartel and that mere facilitating practice or implied agreement is sufficient. Hence, by agreeing to limit deposit interest rate and abiding by that agreement, commercial banks have clearly violated and are still violating existing law of the country.
Apart from being flagrantly illegal, there is not even the slightest justification for the agreement. The primary reason behind letting banks to decide on interest rates and the liberalization of economy in Nepal was to ensure free and fair competition in the market, which in turn can ensure market efficiency and consumer welfare. However, such collusion patently destroyed competition among banks restricting consumers’ options and bargaining capacity in banking sector.
In addition, another argument put forward in support of such collusion is that in absence of the ceiling on deposit interest, lending interest will rise, which might not be economically viable. It is very interesting to note that if banks were so concerned with the rise of lending interest, why did they only fix the limit on deposit interest rates and not the maximum lending interest rate? This argument is unfounded and completely detached from the reality of simple economics of free market. The threat of upward spiral of lending interest rate is merely a hoax and an attempt to use fear in justifying something that is clearly wrong. Free competition among banks can automatically balance lending interests.
After that, efficient banks will be able to operate on the margin once the interest rates are determined by market conditions and simple demand and supply economics.
Hence, the collusion among commercial banks is illegal, unjustifiable, selfish, and harmful to the market and consumer welfare. Competition law is one of the essential pillars of modern economic regulation, especially in case of free and liberal market. In addition, market competition in the form of inter-firm rivalry is, perhaps, the most essential socio-economic instrumentality for the consumer welfare, without which consumers are left without any hope of protection and thus will further increase people’s distrust with banks.
Thus, it is high time banks realized their mistake and broke the cartel. Similarly, the concerned authority, Nepal Rastra Bank and Department of Commerce, should investigate the matter and let the law take its course.
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