Liquidity-starved banks enforce interest rate cartel

Published On: January 27, 2017 12:18 AM NPT By: Sagar Ghimire  | @sagarghi

Deposit rates cap of 12 percent for broader economic interests, say bankers
KATHMANDU, Jan 27: In what seems to be an interest rate cartel, bankers have agreed to cap deposit rates at 12 percent. 

The chief executives of commercial banks reached to an 'informal understanding' for the same during a meeting of Nepal Bankers Association (NBA) held on Thursday. Bankers argue that such step was necessary to stop interest rates 'spiraling out of control' amid shortage of loan-able funds in the banking system due to slowdown in the deposit growth. 

As many banks have been seeing their credit to core-capital-cum-deposit (CCD) ratio go beyond the 80 percent ceiling, they are under immense pressure to increase interest rates for attracting more deposits so that they do not have to stop lending and face regulatory action for their failure to maintain such ratio. 

Though some commercial banks have been offering interest rates of as high as 12 percent on fixed deposit schemes, there has not been much growth on their deposit base, say bankers.  The 'informal understanding' to cap deposit rates was imminent as bankers are not seeing immediate solution to the problem as the Nepal Rastra Bank (NRB) has shown little interest in injecting funds or revise CCD ratio to address the problem.

“The interest rate is continuing to rise. NRB is reluctant to offer any solution stating that this mess is created by us, while the industry and businessmen associations have been requesting us not to up lending rates,” Kishore Maharjan, vice president of NBA, said.

“The liquidity shortage is likely to cripple the economic activities as we have no fund for loans. Even if there is fund, the lending rates are going too high. So, we are making a last ditch attempt,” Maharjan said, referring to their informal understanding to not raise deposit rates higher than 12 percent.

Though some banks are offering 12 percent interest o fixed deposit schemes, many banks, whose CCD ratio has either rose above 80 percent or about to touch that mark, are offering higher interest rates to institutional depositors and retailers who have huge money. 

A commercial bank CEO, who requested anonymity, told Republica that had tried to hold the interest rate at 12 percent last week also. “However, the CCD problem is getting so worse that some CEOs were quoting higher deposit rates than what was agreed in the meeting,” the CEO added.    

Bankers, however, refuse to admit that their move is a cartel. “Since this is something we did for the benefit of broader economy which is choking off due to liquidity crunch, this cannot be called a cartel,” Maharjan, who is also the CEO of Civil Bank Ltd, argued.

“The interest rates are heading toward a difficult situation. If the current trend continues, deposit rates would rise to 13, 14 or 15 percent. What would be our lending rates in that scenario?” Maharjan questioned, adding: “We took the decision because we want to avoid that scenario.”

Many also worry that 'non-stop' rise in deposit rates would be unsustainable. “If deposit rates continue to rise, banks will be compelled to jack up lending rates which will erode the capacity of many borrowers to repay their loans, increasing non-performing ratio,”
Parshuram Kunwar, a financial analyst, said. “The rise of deposit rates now needs to be curbed. Since banks are doing it openly with country's economic interest on mind, the decision is justifiable,” he added. 

NRB Spokesperson Narayan Prasad Paudel says that the central bank always discourages such cartels. "But as we don't have any evidence or written decision, there is nothing that we can do," he added.

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