NRB under pressure to tame bank rates at desired level

Published On: June 20, 2018 04:05 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, June 20: The central bank is under immense pressure to tame the sky-rocketing interest rates at the ‘desired level’ amid shortage of lendable fund in the banking industry as it prepares to unveil monetary policy for the upcoming Fiscal Year 2018/19.

While the ‘interest rate corridor’ system has helped the central bank to keep a check on the volatility of short-term interest rates to some extent, it has not been the case for the public who deposit or borrow fund through financial intermediaries. The rising interest rates in recent months have unnerved borrowers, particularly business firms who believe that their competitiveness will erode in the market due to rising borrowing cost. 

According to business leaders, the rising lending rate of BFIs has discouraged them to borrow and make investment in new projects. Banking executives also say that the central bank should ease the current restriction of credit to core capital-cum-deposit ratio that has crippled their lending capacity despite having adequate liquidity. Due to the NRB rule that requires banks to maintain 80 percent of CCD ratio, they say that they have to curtail lending as most of the banks are nearing the prescribed ceiling. 

The shortage of lendable fund due to mismatch between deposit and credit growth has prompted banks to increase deposit rates for attracting new funds. Some commercial banks have already offered 12.5 percent interest rate on fixed deposits. Institutional depositors are currently getting offers of up to 14 percent interest rates.

Bankers suggest the central bank to channelize the fund of the local units held by the NRB into commercial banks. “There is a fund of over Rs 125 billion allocated to the local units. The fund is held by the NRB. If that fund is channelized through the commercial banks, it can ease pressure on interest rates,” said Bhuvan Dahal, the CEO of Sanima Bank Ltd.

Similarly, Nepal Bankers Association (NBA) has also urged the central bank to provide a relaxation on the CCD ratio rule to address the current shortage of lendable fund.

“The CCD ratio is not important since there are other rules that govern liquidity of banks. So, we have demanded that the government either scrap it altogether or provide some relaxations like allowing us to deduct loans floated to priority sectors while calculating the CCD ratio,” Gyanendra Dhungana, the president of the NBA, told Republica.

According to the NBA calculation, scrapping of the CCD ratio could free up funds up to Rs 125 billion for banks which they can extend immediately as loans. 

However, NRB officials seem in no mood to give such reprieve to banks. “The current shortage is the problem created by banks themselves. They should be making investment by seeing their resources. It’s not wise to demand a tweak in the rule on prudential lending just because their aggressive behavior is causing financial friction,” said an executive director of the central bank. 

“The central bank will bring the monetary policy that helps to channelize resources required to support economic growth,” he added, refusing to divulge the details.

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