Central bank slashes interest rate gap to pull interest rate down

The central bank has – through the first quarter review of Monetary Policy – slashed the spread rate (difference between lending and borrowing rates) of commercial and development banks to pull the interest rates down.

According to the first quarter review of Monetary Policy for the current fiscal year, the commercial banks spread rate will come down to 4 per cent from the current 4.4 per cent, whereas the spread rate of the development banks has been brought down to 4.6 per cent from current 5 per cent. The central bank also said that it will monitor the premium regularly to not let the lending rate to go up.

Though, the central bank dismissed that it has reduced the spread – to pull down the interest rate due to pressure from the private sector, the private sector itself is, however, not satisfied. The private sector has protested against the central bank and banks and financial institutions (BFIs) alleging them of pushing the interest rates up making the cost of doing business dearer.

But executive director of the central bank’s Research Department Dr Prakash Shrestha said that the downward revision of spread has been according to the central bank policy to bring spread rate slowly down, which is expected to bring the interest rate on loans down.

Though, the private sector is not satisfied saying that the interest rate is still higher, the banks and financial institutions are going to lose a huge portion of their profits due to sqeeze in spread. Some 14 commercial banks will feel the heat of the spread rate reduction as some of the commercial banks already have less then 4 per cent spread rate. A banker, without wanting to be named, said that the commercial banks will lose some Rs 10 billion in the profits due to lower spread rate. According to the unaudited reports of first quarter, NIC Asia Bank has 4.39 per cent spread rate, whereas Citizens Bank International has 3.53 per cent spread rake, making an average of 4.01 per cent spread rate of the total 26 commercial banks. 

The private sector’s another concern working capital loan guidance will be addressed, based on the suggestions received. “It has been operational, and will be addressed as and when the suggestions we receive,” Shrestha added.

The central bank, unveiling the first quarter review of the Monetary Policy 2022- 23, also reads that the BFIs, which are unable to provide loans in the designated areas due to liquidity crunch can calculate the shortfall from mid-December 2023 on basis of mid- June 2023. “The fine imposed on BFIs will be reviewed based on the liquidity risk, if the specified loan-deposit ratio is not reached,” it reads, adding that investments made by BFIs in the bonds issued by public limited companies related to the agricultural sector in the secondary market will also be allowed to be counted within the specified limits so that the BFIs has to invest minimum loans in that sector. “The microfinance financial institutions will, however, have to publish the base rate on monthly basis from mid-January.”

The central bank has also given continuity to the major policy of the Monetary Policy as the pressures on price and external sector stability still remain. Likewise, the Monetary Policy has maintained the targets and projections.