Central bank circular could destabilize financial sector: NBA

Published On: August 8, 2019 06:00 AM NPT By: Sagar Ghimire


Demands review provisions

The NBA has termed the revision of the interest rates spread calculation formula as sudden and irrelevant. It claimed that the tweak on the formula will squeeze nearly 25 percent, or Rs 30 billion, profit of the banking sector.

KATHMANDU, Aug 8: Nepal Bankers Association (NBA) has warned that some of the provisions in the recent circular of the Nepal Rastra Bank could have an adverse impact on the banking sector and the overall economy.

In a strongly-worded statement released on Wednesday, the umbrella organization of all 28 commercial banks of the country has warned that the circular issued by the NRB on Monday threatens the stability of financial sector of the country.

The NRB circular, which aims to implement the key provisions of the monetary policy for the current fiscal year 2019/20, has fuelled discontent among banking executives who say that the new rules will hit the banks' profits.

After a meeting on Wednesday, the NBA expressed its objection to some of the key provisions of the new circular.

The NBA has expressed its reservations particularly over the revision of the formula to calculate the interest rates spread, increment in the counter cyclical buffer requirement [a type of cushion against economic ups and downs], and a ban on the bancassurance [insurance services offered through banks].

“The NRB circular will have a big impact on the overall economy of the country and raises questions on the stability of financial sector, which is the most successful and transparent sector of the country,” read the statement. “Thus, the meeting has decided to request the NRB to review the provisions as soon as possible.”

The NBA has termed the revision of the interest rates spread calculation formula as sudden and irrelevant. It claimed that the tweak on the formula will squeeze nearly 25 percent, or Rs 30 billion, profit of the banking sector.

Under the new formula, commercial banks will not be allowed to include their interest earnings from investments in government securities in the spread rate, which is the difference between interest rates of loans and deposits. The new rule means that the real spread will be lower than the actual difference between lending and deposit rates.

Similarly, the NRB decision to raise the counter cyclical buffer by 2 percentage points will also hit the lending capacity of banks, according to the NBA. This means banks will now be required to maintain 13 percent of capital adequacy ratio from existing 11 percent due to the increase of two percentage point in counter-cyclical buffer. This rule will require banks to arrange additional capital to disburse loans.

The NBA estimates that loan disbursements could shrink by nearly Rs 150 billion due to the new counter-cyclical buffer requirement. “The provision will adversely impact the monetary policy's target to increase the private sector credit growth by 21 percent and make this fiscal budget's target to attain 8.5 percent economic growth difficult,” it added.


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