Bankers say rates hike needed to prevent deposits from flowing to other banks

KATHMANDU, Dec 19: Interest rate war is escalating in the banking sector as bigger commercial banks have also joined the race by raising their fixed deposit rates. They have argued that such a move was necessary to prevent their deposits from flowing toward smaller banks which are offering higher interest rates. 

Nabil Bank Ltd, one of the largest commercial banks in the country, announced 13 percent interest rate on its fixed deposit account on Monday, following some smaller commercial banks which raised their interest rates on fixed deposit to 13 percent after the Nepal Bankers Association (NBA) decided to ditch the interest rate cap. 

Himalayan Bank Ltd, another big commercial bank, was also quick in raising its interest rate to 13 percent. Both banks not only offer 13 percent interest rates to depositors on fixed deposits but also provide interest payment on a monthly basis. 

With these two major commercial banks providing higher interest rates, the interest rates war is likely to intensify as other commercial banks are reportedly preparing to raise their interest rates to deal with the acute shortage of loanable fund.

There are concerns from business and industry groups that the competition among banks to provide higher rates on deposits will result into rise in borrowing cost for them. 

Bankers say that they do not have any choice to raise interest rates for holding their stock of deposits intact. “There was a gentleman agreement about the interest rates cap. Later, the cap was scrapped after some banks did not agree on it,” said Ashok Shumsher J B Rana, CEO of Himalayan Bank Ltd. “As they have already raised their deposit rate, we also decided to increase because we think that there is no reason why our loyal depositors should not get interest rates that other banks are offering,” he added.

Some say that the move of the bigger banks will drive up interest rate further.

“Bigger banks are matching the deposit rate offered by younger banks. What will the younger banks do? Probably, go for another increment to make sure that they do not lose deposits to bigger banks. This means the interest rates war will drag on,” said a banker, requesting anonymity. 

Bankers are cautious that their deposit volume does not get depleted further at the second quarter-end when business firms will pay income tax. Deposit volume of banks tends to decline as businesses withdraw huge amount of money to file their taxes by second quarter-end i.e. mid-January.

NRB uses moral suasion
Nepal Rastra Bank (NRB) on Tuesday summoned over a dozen executives of the bank and financial institutions (BFIs) to discuss escalating interest rate war.

During the meeting held at NRB on Tuesday, senior officials of the NRB urged BFIs, through moral suasion, to resist the temptation to increase interest rates for the stability of the financial market.

Moral suasion is a method that is adopted by the regulator to correct certain behavior to morality through persuasion rather than corrective measure or action. 

“We told them that the competition for raising interest rates will only drive interest rates further. So they have to become restraint,” Narayan Prasad Paudel, the spokesperson for the central bank, said.

 
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