KATHMANDU, Oct 12: Following widespread complaints that banks have been reluctant to lower their interest rates despite being in a comfortable liquidity position, Nepal Bankers Association (NBA) -- the umbrella organization of 28 commercial banks -- has decided to bring the cap on deposit rates by 0.5 percentage point.
The decision of the NBA, which has been criticized by many as an association that often acts like a banking cartel, will help banks to bring down their cost. However, the association does not cap lending rate, giving banks a leeway to set their interest rates that they charge on credit. The World Bank has also termed the practice of NBA to set the interest rate cap as an example of 'anti-competitive behavior'.
According to the decision of the extended meeting of member banks of the NBA held on Thursday, commercial banks will not be allowed to offer fixed deposit of rate more than 10 percent to individual depositors, while the deposit rate for institutional depositors has been capped at 9 percent. Earlier, such caps on individual and institution deposits were 11 percent and 10.5 percent, respectively.
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The NBA had first enforced the cap on fixed deposits for institutions and individuals as well as on saving deposit rates in March following intense competition among bank and financial institutions to raise interest rates for attracting deposits in the wake of acute shortage of lendable fund. Bankers have been defending their decisions, saying the interest rate cap was needed to prevent 'interest war' among banking institutions that could harm the country's economy.
However, with the liquidity situation becoming comfortable, due to the rise in deposits coupled with some measures introduced by the Nepal Rastra Bank (NRB) through the monetary policy, the NBA has brought down its interest rate caps.
Similarly, the NBA has decided to keep the saving rate cap unchanged at 7 percent. But, banks will not be allowed to offer saving rate lower than 5 percent.
Bankers, however, say that they have to wait until second quarter to revise their lending rates.
“The decision to lower the cap will help to reduce the cost of fund. This is expected to push the base rate by second quarter. Then we can lower lending rate,” Ashok Sherchan, an executive member of the NBA, told Republica.
