Will the decision to regulate deposit rates lower lending rates? – The Himalayan Times – Nepal’s No.1 English Daily Newspaper
Will the decision to regulate deposit rates lower lending rates?
- One of the reasons for the rise in deposit rates is the slowness of public capital expenditure
Kathmandu, June 21
The Nepalese Bankers Association (NBA) has once again decided to regulate deposit rates without giving the assurance of curbing the boom in lending rates. This is an indication that commercial banks are more interested in reducing their spending by forcibly lowering deposit rates, while maximizing their income by maintaining high lending rates.
The NBA today banned the 28 commercial banks from offering more than 11% annual interest to retail depositors who place money in term deposit accounts. The interest threshold on funds deposited by institutional depositors in fixed accounts has been set at 10.5 percent. The NBA also said that the returns on money placed in a savings deposit
counts should not exceed seven percent.
The decision to regulate deposit rates came as banks “began to engage in unhealthy competition to poach deposits from other institutions, pushing up interest on deposits,” according to the CEO of Sanima Bank, Bhuvan Dahal, who attended the NBA meeting.
Deposit rates have been rising in recent times largely due to subdued growth in remittance income, weak government capital spending, and surging imports, which are triggering capital flight. These reasons have pushed interest on institutional term deposits to surpass 13 percent recently. This deposit rate would have been acceptable to many about two years ago, when inflation was in double digits. But now inflation has fallen to 4.1%, which means the value of money is eroding much more slowly than before. It is also believed that inflation will hover around this level for the foreseeable future if the government succeeds in removing supply constraints, as India, where most of Nepal’s imports come from, has introduced a policy of restraint. inflation within a range of two to six percent.
These developments suggest that deposit rates should not be too high, said Sashin Joshi, former CEO of Nabil Bank. âHaving said that, I don’t really like the practice the NBA is stepping into because it will set a bad precedent,â Joshi added.
The NBA is an umbrella organization for commercial banks and lobbies to protect their interests. However, it is not allowed to regulate interest rates. But this is not the first time that the NBA has resorted to this measure. It had also capped deposit rates earlier, but later overturned the decision after banks started to exceed the threshold set by it.
It is not known how long the banks will abide by the latest NBA instruction. But what is surprising is that the NBA acted on the advice given by the Nepal Rastra Bank (NRB), the regulator of the banking sector.
“We called the representatives of the banks that were raising deposit rates for a meeting and told them to work on stabilizing deposit rates,” NRB spokesman Narayan Prasad Paudel said. “The latest move by banks to stabilize deposit rates is rational.”
This raises the question of who regulates the Nepalese banking sector: the NBA or the NRB?
âOf course, it is our responsibility to ensure the stability of the banking sector,â said Paudel of NRB. âBut we only have indirect instruments to make interventions. What is needed now is direct intervention. But we cannot do it, because it would be against the market economy policy, âsaid Paudel.
But Joshi doesn’t want to buy this argument. âThe NRB cannot shirk one of its main responsibilities to ensure the stability of interest rates,â Joshi said. âIf he doesn’t have an instrument, he should create one. Where is the innovation?
The BNR should take responsibility for stabilizing interest rates because, along with deposit rates, loan rates must also be kept within a certain range so that they are affordable for borrowers. Currently, the credit offered by banks is more expensive than that of microfinance institutions, which do not have the right to apply a loan rate higher than 18%.
The issue of keeping lending rates under control was raised at the NBA meeting today. “But most NBA members said lowering deposit rates would automatically lower lending rates,” said two bankers, who attended the meeting.
But this has not been the case in the past.
When the NBA regulated deposit rates in the past, lending rates continued to rise, raising the cost of borrowers’ debt service. Thus, the possibility that regulated deposit rates fail to contain lending rates cannot be ruled out. Such a scenario will cause more suffering for borrowers, especially businesses, who cannot afford to pass the full additional cost of servicing debt on to consumers because of the risk of losing their competitive edge.
“The problem of high interest rates stems from random loan disbursements in the first quarter of this fiscal year,” said Paudel of NRB, calling the decision short-sighted as credit was extended without identifying appropriate sources for collecting deposits. . For this reason, commercial bank credit disbursements have exceeded deposit collection so far during the year. Commercial banks have collected 270 billion rupees in new deposits since the start of this fiscal year from mid-July to 15 June, but have disbursed 334 billion rupees in loans during the same period, according to the latest NBA report. .
âUnless banks fail to strike a balance between assets (disbursing credit) and liabilities (taking deposits), the problem will continue to recur,â Paudel said.