KATHMANDU, June 22: With tacit support from the Nepal Rastra Bank (NRB), the Nepal Bankers’ Association (NBA) has once again decided to cap interest rates on deposits.
A meeting of the NBA held on Thursday in the presence of the CEOs of all 28 commercial banks decided to revive its ‘gentlemen’s agreement’ on capping interest rates on deposits. NBA had a few weeks ago removed the cap.
Now, commercial banks will not provide more than 7 percent interest on savings account while the maximum interest rates on fixed deposit will be 11 percent for ordinary depositors and 10.5 percent for institutional depositors. Currently, some banks have been accepting fixed deposits at up to 13 percent interest while institutional depositors are getting 14 percent interest on their deposits.
Bankers point out ‘unfair competition’ among commercial banks in the absence of a cap as the reason for their decision to reintroduce the cap.
Revised interest rate corridor system introduced
However, NBA President Gyanendra Dhungana would not acknowledge that the umbrella organization of commercial banks again fixed a cap on the interest rates apparently to avoid the backlash over the decision that was criticized as ‘interest rates cartel’.
“We haven’t fixed any cap as NBA was earlier criticized as cartel for the decision to cap interest rates. Instead, we have agreed on a interest rate framework that allows banks to provide savings interest close to the inflation rate and some percentage points higher on fixed deposits,” said Dhungana.
“The NBA move supported by all member banks aims to curb unhealthy competition among banks to attract funds. Such competition would only add to the already heavy financial burden on borrowers,” added Dhungana.
While Dhungana refused to acknowledge that a new interest cap was introduced, another executive member of the NBA told Republica that the meeting indeed capped the interest rates on savings and fixed deposits.
“The meeting has also decided to stop payment of interest on daily or monthly basis,” said the executive member. “Those who violate the agreement will face action,” he added without explaining the action.
When asked why they first decided to remove the cap and then reintroduce it, he said, “Earlier, the media accused us of operating as cartel. So we briefly removed the cap on interest just to show how unruly can the market be in the absence of cap.”
Earlier on June 10, the NBA had ditched the cap on interest on deposits it had introduced in March, citing acute shortage of lendable funds in the banking system.
Even the Nepal Rastra Bank (NRB) has been turning a blind eye to the move of the NBA that goes against the free market practice. “We should not take amiss the initiative of the forum of banks to maintain stability of interest rates,” Narayan Prasad Paudel, the NRB spokesperson, told Republica.
NBA’s previous decision to cap interest on deposits was criticized by the World Bank as an ‘anti-competitive’ behavior. “Feeling squeezed by the credit to core-capital-cum-deposit (CCD) ratio limit, some banks’ attempts to attract new deposits by offering higher rates in excess of 10 percent have been curtailed by the Nepal Bankers’ Association,” read the Nepal Development Update of the World Bank released on April 17.
