NRB prescribes banks modality to fix minimum lending rate

The central bank has asked the banks to fix their minimum lending rate for commercial purpose based on their cost of fund to become cost effective and competent.

"The banks could have their own base rates but that has to be calculated on the basis of central bank prescribed modality," said central bank governor Dr Yubraj Khatiwada.

Currently the banks fix the lending rates calculating various componenets like cost of fund, CRR and cost of operation on their own as the central bank does not directly dictate the interest rate.

It would be a normal indicative rate for commercial purpose based on their cost of fund, the governor said, adding that the central bank will however, monitor the benchmark rate published by the banks.

Earlier, the banks were blamed for entering into 'gentlemen agreement' on howmuch interest to pay for institutional deposits or lending. However, the new rule that will be objective and transparent is expected to make it easier for the banks to offer lending rates to their borrowers.

"The transparent and objective system will also increase competition among the banks to be efficient," Khatiwada added.

The banks will calculate their base rate on lending and submit it to the central bank, said Nepal Bankers Association (NBA) president Ashoke Rana.

According to some bankers, the base rate was also necessary as some of the banks with surplus liquidity — that has added the bank's cost of fund as they have offered higher rates on deposit due to liquidity crunch a year ago — and sqeezing market, were chasing the borrowers offering them lower rates than they could afford in a cut-throat competition.

"Earlier, some banks were helping few borrowers make profit at the cost of thousands of depositors," a banker said, without wanting to be named.

On the other hand, due to higher interest rate, private sector has been shying away from from borrowing.

According to central bank data, credit floated to the private sector amounted to about Rs 780 billion at the end of fiscal year 2011-12, which stood at Rs 690 billion in the beginning of the fiscal year. But, the deposit mobilisation of financial institutions increased by 22.9 per cent, which had recorded a 12.9 per cent increment a fiscal year ago.

The governor claimed that with the transparent base rate, the borrowers will also get the clear picture on why and how the bank is charging them the interest rate. "Once it is transparent, the borrowers will also understand that the cost of funds of the banks have increased pushing the interest rate up," he added.