Bankers tell central bank not possible to cut spread rate

Bankers have asked the central bank to become flexible on spread rate.

Writing a letter to the central bank today, the Nepal Bankers’ Association (NBA) said that they are unable to reduce the spread rate to five per cent, as prescribed by the monetary authority.

After the borrowers complained of 'unnatural' fluctuation on lending and deposit interest rates, the central bank had directed the commercial banks to maintain a spread rate at five per cent by the end of the current fiscal year 2013-14.

The banks have to either reduce the lending rate or increase the deposit rate to maintain the spread. However, with the bulging deposits and low borrowing in the recent months, the banks have been finding it difficult to bring the lending rates down or increasing the deposit rates.

The spread rate of the commercial banks stands at 6.93 per cent as of mid-November, according to the central bank data.

Likewise, the interest rate of 91-day Treasure Bills – that went up to nine per cent in 2010 – also plunged down to 0.4255 per cent on December 18.

"Low economic growth and high inflation has made it difficult for the banks to expand the financial market," said the letter to the governor, and deputy governors. "The operating expenses have increased by 16 per cent in last fiscal year 2012-13."

The bankers have also claimed that the fixed interest rate will have a long-term impact on the banking sector. "The provision will affect the banks’ plans to expand services to remote areas and will have negative impact on government-owned banks which are already facing high operating expenses," the letter read, adding that the banks will be discouraged to accept deposits, which will fuel capital flight, also due to a fixed spread rate.