Central bank sets deadline for banks to bring spread rate down

The central bank has asked the commercial banks to bring down their average interest rate difference between deposit and lending to five per cent – by the end of the current fiscal year – to monitor and check the interest rate volatility.
The commercial banks must bring their interest spread rate to five per cent by mid-July 2014, also according to the Monetary Policy for the current fiscal year 2013-14, said the central bank today.

The average spread rate will be calculated based on monthly average interest income and expenses and average credit and deposits with the bank, according to the central bank that has made it mandatory for them to publish regularly starting from the second quarter of the current fiscal year.

Earlier, the central bank had brought the concept of interest rate corridor to help maintain between the higher and lower cap, before bringing the base rate to make the banks lending rates more transparent and check interest rate movement.

According to the central bank, it was forced to fix the spread rate since the banks and financial institutions failed to address higher spread rate despite repeated request from the central bank and the borrowers.

However, the banks and financial institutions have claimed that they have maintained the spread rate at the best possible standard also to encourage borrowing from the private sector. There are only a few banks that have interest spread higher than five per cent, the bankers claimed.

But the central bank data revealed that spread rate has been increasing. In mid-July, the spread rate stood at 6.84 per cent, which has surged to 7.01 per cent lately forcing the central bank to intervene.

Higher interest rates will discourage the private sector borrowing that could have negative impact on industrial growth that has already been looking down since last one decade.

Bring the share of institutional deposits too: Central bank

The central bank has also asked the banks and financial institutions to bring down the share of institutional deposits to 60 per cent by the end of the current fiscal year, and widen the customer base that will strengthen them.

Heavy concentration on institutional deposits exposed the banking sector to a systemic failure due to mismatch between deposit and lending. The central bank has directed the banks and financial institutions that they could accept institutional deposit of up to 20 per cent of total deposits from a single institution. Asking the banks and financial institutions to include operation risk apart from liquidity, interest rate, foreign exchange and loan and advances risks, the central bank has asked them to develop an efficient internal control and information systems. The internal auditor should have to mention whether adequate measures have been taken to manage operation risks in each branch and department in their internal audit report. The commercial banks also have to audit their existing information system and submit the report to the central bank within mid-January 2014.