Central bank intervenes after banks raise interest rates on savings

 Though its wrong principally to interfere in the free market, the central bank has interfered in the banks and financial institutions asking them to return the interest rate imposed on savings from October 18.

Claiming that the banks have increased the interest rates arbitrarily to attract deposits from other financial institutions Nepal Rastra Bank (NRB) has issued a three-point directive tonight. Most of the banks and financial institutions (BFIs) termed the central bank's move as a 'micromanagement' in the financial market.

According to the free market principle, the central bank cannot interfere in the interest rates of the BFIs. "But some banks have created fake deposits and others have tried to lure the deposits by offering higher interest rate, which is going to hit the economy," a central bank official claimed, adding that the banks have given no space but to intervene in the interest rate due to their cut throat competition to literally 'snatch' deposit. "The central bank wishes the interest rate to remain in the single digit."

But according to the banks, they are facing lonable fund crunch also due to central bank's policy to scrap credit to core capital plus deposit ratio (CCD) and implement credit-deposit ratio (CD) -- through the Monetary Policy 2021-22 -- which means banks can lend Rs 90, only if they have Rs 100 deposit. 

Most of the banks increased interest rates on savings and term deposits with effect from October 18 as is the practise of announcing the interest rate on the monthly basis, under the regulatory compliance. Some banks offered more than 11 per cent interest rates -- on personal and institutional deposits -- which is more than 30 per cent increment from the interest rate a month ago.

According to the directive, banks and financial institutions can change -- upward or downward -- the interest rate of any type of deposit by only 10 per cent of the previous month’s interest rate.

Likewise, the interest rate on institutional term deposits (including bidding) should be at least one per cent lower than the maximum interest rate on term savings to the public, the directives reads, asking the banks and financial Institutions to republish the new interest rate on its website by Wednesday and in national daily newspapers within Friday.

One banker said that the central bank has always been micro-managing the banks and financial institutions, and the current directive is only a step forward.