Nepal Bankers’ Association (NBA) has decided to cap the interest rate on savings, individual fixed deposits and institutional fixed deposits, bowing down to strong pressure from the Finance Ministry and central bank.
The association today – during a meeting – agreed to provide maximum of 9.25 per cent interest to individual depositors, 8.5 per cent to institutional depositors, 6.5 per cent in saving deposits and 4.5 per cent on call deposits.
The decision will come into effect from tomorrow, though the unnatural decision to suppress the rates could bring side effects to the economy.
The banking sector has been competing to increase interest rate due to tight loanable fund. The tightening liquidity situation has created interest rate volatility as the commercial banks began waging an interest rate war by offering higher rates to the depositors by ditching their ‘gentlemen’s agreement’ on interest rates three weeks ago.
Three weeks ago, the association had agreed to limit interest rate on savings to seven per cent and 10 per cent each on individual fixed deposit and institutional fixed deposit. But some banks – news and established ones both – had started accepting fixed deposits at up to 13 per cent interest rate lately after the association let them fix interest rate, on their own.
Following such volatile interest rate regime, the central bank has directed commercial banks to bring down the interest rate on deposits, though it could have adverse impact to suppress the interest rates.
A study committee led by deputy governor of central bank Shivaraj Shrestha has also recommended the Finance Ministry to bar banks and financial institutions from adding premium of over two per cent to the base rate while setting lending rates for the priority sector as a few banks were found adding a premium of up to 12.5 per cent to the base rate, prompting lending rates to shoot up.
Likewise, the committee has also suggested introducing a measure mandating banks and financial institutions to tie up their savings deposit rate to inflation to ensure depositors do not lose out when parking money in the financial institutions.
The commercial banks had started competing in interest rate to attract deposits, breaching their earlier 'gentleman’s agreement'. If the banks suppress the interest rates or start unhealthy competition to hike rates to lure more deposits, either way the economy is getting hurt.
On December 7, the Finance Ministry had formed a panel under central bank deputy governor Shrestha to study the impact of soaring interest rate. The panel – in its report submitted yesterday – recommended the government to put a cap on the bank interest rate to address problems seen in the money and capital markets.
The panel has presented 58 points to address the shortage of loanable fund along with the slump in stock exchange market for short term, medium term and long term.
The panel has also asked the government to reduce the risk weight in shares to 100 per cent from previous 150 per cent. It has also suggested increasing the threshold of margin on loan against shares to 65 per cent from the existing 50 per cent and allowing banks to invest up to 40 per cent of their core capital in shares. At present, the central bank has restricted banks to issue loan in shares only up to 25 per cent of the core capital.
The association today – during a meeting – agreed to provide maximum of 9.25 per cent interest to individual depositors, 8.5 per cent to institutional depositors, 6.5 per cent in saving deposits and 4.5 per cent on call deposits.
The decision will come into effect from tomorrow, though the unnatural decision to suppress the rates could bring side effects to the economy.
The banking sector has been competing to increase interest rate due to tight loanable fund. The tightening liquidity situation has created interest rate volatility as the commercial banks began waging an interest rate war by offering higher rates to the depositors by ditching their ‘gentlemen’s agreement’ on interest rates three weeks ago.
Three weeks ago, the association had agreed to limit interest rate on savings to seven per cent and 10 per cent each on individual fixed deposit and institutional fixed deposit. But some banks – news and established ones both – had started accepting fixed deposits at up to 13 per cent interest rate lately after the association let them fix interest rate, on their own.
Following such volatile interest rate regime, the central bank has directed commercial banks to bring down the interest rate on deposits, though it could have adverse impact to suppress the interest rates.
A study committee led by deputy governor of central bank Shivaraj Shrestha has also recommended the Finance Ministry to bar banks and financial institutions from adding premium of over two per cent to the base rate while setting lending rates for the priority sector as a few banks were found adding a premium of up to 12.5 per cent to the base rate, prompting lending rates to shoot up.
Likewise, the committee has also suggested introducing a measure mandating banks and financial institutions to tie up their savings deposit rate to inflation to ensure depositors do not lose out when parking money in the financial institutions.
The commercial banks had started competing in interest rate to attract deposits, breaching their earlier 'gentleman’s agreement'. If the banks suppress the interest rates or start unhealthy competition to hike rates to lure more deposits, either way the economy is getting hurt.
On December 7, the Finance Ministry had formed a panel under central bank deputy governor Shrestha to study the impact of soaring interest rate. The panel – in its report submitted yesterday – recommended the government to put a cap on the bank interest rate to address problems seen in the money and capital markets.
The panel has presented 58 points to address the shortage of loanable fund along with the slump in stock exchange market for short term, medium term and long term.
The panel has also asked the government to reduce the risk weight in shares to 100 per cent from previous 150 per cent. It has also suggested increasing the threshold of margin on loan against shares to 65 per cent from the existing 50 per cent and allowing banks to invest up to 40 per cent of their core capital in shares. At present, the central bank has restricted banks to issue loan in shares only up to 25 per cent of the core capital.
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