Central bank brings base rate to help financial institutions

The central bank has asked commercial banks to calculate the base rate — as reference rate — for lending on the basis of five indicators; cost of fund Cash Reserve Ratio (CRR) — that is also called the liquidity ratio as it seeks to control money supply in the economy — Statutory Liquidity Ratio (SLR) — operational cost and return on assets (RoE).
It has also provided a modality to calculate the five indicators for the uniformity of the banks to ensure the stability of monetary market in the volatile situation as the interest rates are fluctuating and could hit the sustainability and long term stability of the financial system, according to the central bank.
Though, the central bank has set different formula to calculate administrative cost and cost of maintaining capital reserve ratio and statutory liquidity ratio, it has fixed return on assets at 0.75 percent for all.
If the regular calculation of the base rate during the volatile interest rates is maintained, the financial system could be string, the central bank added.
The central bank was all set to introduce base rate on lending before Tihar to provision interest rate regime transparent.
Base rate is the minimum interest rate that banks should charge on lending.
Once in place, banks would not be allowed to extend loans to borrowers below the base rate.
The central bank had initially planned to introduce the provision before Dashain but it was delayed due to various reasons, including Nepal Bankers’ Association (NBA) opinion. The central bank had formally announced to introduce base rate.

The long-awaited provision is expected to make credit pricing more transparent.
It is now mandatory for all commercial bank to fix lending rates based on base rate. They have to publish the base rate within mid-January before implementing it. The base rate will set the floor for credit rates and gives borrowers a basic idea on how cheap they can get credit for.