NBA continues deposit rate cap despite easing liquidity situation
April 24, 2018 02:52 AM NPT
KATHMANDU, April 24: Nepal Bankers Association (NBA) -- the umbrella organization of 28 commercial banks -- has decided to give continuity to the cap on fixed and saving deposit rates.
The decision taken by the meeting of NBA held on Monday comes despite recent reports that the shortage of lendable fund has eased in recent days.
Though bank and financial institutions (BFIs) are observing a rise in deposits in recent days, the decision of the NBA to stick with the interest cap on deposit restricts its member banks to review their interest rates. The deposit rate cap, which goes against the competitive market behavior, has been criticized as 'interest cartel' of banks.
“Liquidity situation seems to be easing in recent days. However, the interest rates are market driven. It's not us who raise or reduce the rates,” Gyanendra Dhungana, the NBA president, told Republica. “Interest rate movement is determined by the market. However, we have decided to continue to move ahead with the understanding that we have made on the interest rates for at least a month.”
Earlier in January after banks started to compete to hike rates for attracting deposits following acute shortage of lendable fund, the NBA fixed deposit rate at 11 percent and saving rate at 8 percent. NIC Asia Bank Ltd had to face a backlash after it breached the cap and decided to offer higher deposit rates. But, the commercial bank was compelled to withdraw the scheme after the NBA ostracized the bank by deciding that its remaining 27 member banks would suspend interbank transactions with NIC Asia.
The 'interest cartel' of NBA has also been enjoying inconspicuous support of the Nepal Rastra Bank (NRB). While the government has been making efforts in recent days to bust the transport syndicate, the central bank -- the regulatory authority of banking institutions -- has been reluctant to stop banks from fixing such anti-competitive practice.
However, NBA leaders say that the decision of the organization to fix interest rate cap is a 'general understanding' among bankers to prevent runaway rate hikes.
CLEAR EXAMPLE OF ANTI-COMPETITIVE BEHAVIOR: WORLD BANK
Meanwhile, the World Bank has termed the decision to cap the interest rate an example of 'anti-competitive' behavior.
In its recent 'Nepal Development Update' released last week, the World Bank said that the move of the NBA to fix interest rate at a certain level is promoting 'anti-competitive' behavior among banks.
“While deposit and lending rates have gone up, there are signs of anti-competitive behavior by commercial banks to maintain them at these levels,” read the report. “Feeling squeezed by the CCD ratio limit, some banks' attempts to attract new deposits by offering higher rates have been curtailed by the Nepal Bankers' Association. This is a clear example of anti-competitive behavior by coercing banks to maintain interest parity among themselves.”