NBA decision to ditch cap sparks interest rate war

Published On: December 6, 2018 04:30 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Dec 6: The decision of the Nepal Bankers' Association to remove interest rate cap on individual fixed deposits has sparked interest rate competition among commercial banks.

As soon as the interest cap of 11 percent was scrapped, Janata Bank Ltd announced a fixed deposit scheme carrying 12 percent interest rate. Under the scheme, the commercial bank said that it would provide interest on monthly basis. Another commercial bank, Machhapuchhre Bank Ltd, moved a step forward and announced 12.5 percent interest rate on fixed deposit. Other commercial banks whose credit to capital plus deposit (CCD) ratio is going to burst are likely to follow the suit to lure fresh deposits so that they can escape the regulatory limit.

“There is a kind of panic among many banks over the possibility of punitive action from the central bank due to CCD ratio breach,” Roshan Neupane, CEO of NIC Asia Bank Ltd, said. “They are struggling to find funds. As there will be no cap, banks will be raising their interest rates on individual fixed deposits to lure funds to avoid fine from the central bank,” he added.

Banks breaching 80 percent CCD ratio limit of the central bank face punitive actions. Most of the commercial banks are nearing the limit.

According to Narayan Prasad Paudel, the spokesperson for the central bank, the average CCD ratio of 28 commercial banks as of Sunday stands at 77.4 percent.

Though the NBA has been long standing behind its decision to cap interest rates on deposits despite criticisms by many for what they call anti-competitive behavior, it suddenly decided to allow its member banks to fix fixed deposit themselves. But, it has continued to impose the cap on interest rates for institutional fixed deposit and saving rate.

The NBA has given continuity to the interest rate cap of 7 percent on savings deposit. Similarly, no change has been made on the upper limit of 10 percent interest rate on institutional fixed deposits.

A member of the NBA told Republica that the decision to remove cap was due to the pressure from some new banks who were reeling under acute shortage of lendable fund and the breach of CCD ratio as well from old banks that were relying largely on institutional depositors as their source of funds.

“Many small banks were struggling to get funds because institutional depositors were reluctant to park their deposits in the small banks who could not offer higher rate due to the cap. On the other hand, big banks' dependence was increasing and they were breaching the regulatory limit of institutional deposits,” said a banker.

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