Cartel it is

Published On: January 28, 2017 12:35 AM NPT By: Republica  | @RepublicaNepal

New deposit rate cap 
The decision of the commercial banks on Thursday to cap the deposit rate (the rate they offer depositors) at 12 percent is a clear case of cartelling. No amount of spin that bankers are trying to put on the ‘informal understanding’ will change this cold fact. In a functioning market economy, it is illegal for players in an industry to get together and arbitrarily set common rules of engagement with the market. Some bankers 
Republica talked to tried to justify the decision, saying that the deposit rate was threatening to get out of control. With deposit rates so high, who could afford to borrow from the banks at even higher rates? The other justification we heard was that such a step had become important as the worsening loan crunch could gum up the whole economy. A few other bankers were of the view that with Nepal Rastra Bank (NRB) refusing to come to the rescue of commercial banks—for instance by increasing the ratio of money that banks can turn into loans (which currently stands at 80 percent)—they had no option but to look after their own interest. 

All these arguments are deeply flawed. First, it should be the market, not a cartel of banks, which should decide the rates depositors get. It is also disingenuous of the bankers to argue that if deposit rates are not capped their lending will be prohibitively expensive, bringing the economy to a standstill; however high the deposit rates, 
commercial banks can’t lend by exceeding the spread rate set by the central bank. Nor is their argument that the NRB is not doing enough credible. The main reason commercial banks are facing liquidity crunch is that following the lifting of the border blockade in February 2016 they started to wantonly lend, mostly to unproductive real estate sector, in search of quick profits. So today’s liquidity crisis is largely of their own making. And the central bank can’t relax the loan to deposit ratio because, then, the commercial banks could be overexposed and depositors’ money would be unsafe.  

Rather than always looking at the central bank to come to their rescue and resorting to cartelling when it does not, the focus of the commercial banks right now should be to use the opportunity provided by liquidity crunch to clean up their loan books. It is about time they opened their loan books and honestly evaluated the quality of their lending. How much of their loans are going to the productive sector? How do they reduce the 
volume of their non-performing assets? And are they meeting the regulatory guidelines, for instance of at least 20 percent of their loans being extended to the productive sector and at least five percent to the ‘deprived sector’? Yes, we understand that commercial banks need to make profit for their shareholders. But profit-maximization can’t be their sole objective. As the principal agents for the circulation of money in the economy it is also their responsibility to ensure that as they prosper so does the society they function in. In their blind quest for profit our bankers seem to have forgotten their social obligation. 

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