Base rate implementation unsatisfactory Central bank mulls intervention

KATHMANDU, MAR 1:

On November 12 last year, Nepal Rastra Bank (NRB), the central monetary authority, made a groundbreaking move by directing commercial banks to reveal base rates when they publish first-half financial results by mid-February.

This was the first time the central bank had made a serious effort toward making credit pricing more transparent. And it was thought the announcement of base rates would give borrowers a basic idea on places to get cheap credit.

As mid-February approached, banks started publishing base rates. Finally, it became known that Standard Chartered Bank Nepal was the best place to go for loans as it could extend credit at a rate as low as 6.8 percent, while state-run Agricultural Development Bank Ltd was the worst as its base rate stood at 12.35 percent, the highest among commercial banks. Other banks came up with their own numbers in between these figures.

This public disclosure made by banks should have made the job of those shopping for loans a lot easier as they could go through a list and approach an institution that was offering one of the best rates.

But that is not happening as many banks, according to NRB, are currently providing loans at far higher rates than those made public.

“We were hoping that banks would mark up base rates by one or two percentage points and derive most of their lending rates… We were expecting banks to show this spirit,” NRB Spokesperson Bhaskar Mani Gyawali told Republica. “Yet our initial studies have shown that many banks have failed to live up to our expectations and some are even marking up base rates by as much as a 100 percent.”

Gyawali´s comment generally means a bank which has fixed a base rate of nine percent could have factored in risk associated with loans and extended credit at an interest rate of around 11 percent. But instead of this, they are extending loans at a rate as high as 18 percent.

This, on one hand, is preventing borrowers from taking full advantage of a system that was devised to make credit pricing transparent, while on the other hand is widening the interest spread -- the difference between deposit and lending rates.

The unaudited first-half financial reports of commercial banks show that interest spread stood at the highest of 6.27 percent as of mid-January, with the spread of most of the banks hovering at a range of four to five percent.

This gap is widening lately as most of the commercial banks have reduced their deposit rates -- returns offered by banks to those parking money -- without making significant changes to lending rates -- the interest at which banks provide loans to borrowers.

Although the central bank has not fixed a ceiling on interest spread, discussions with different high-ranking NRB officials gave Republica a hint that they do not prefer the spread to go beyond a three percent mark.

“Our job is not to direct banks to fix certain lending and deposit rates as the banking sector´s interest rate regime is fully liberalized,” Gyawali said. “But if banks only think of increasing profits and handing over more dividend to shareholders, without considering other factors, we might have to intervene,” he added.

Such intervention, according to Gyawali, could include fixing of a ceiling on interest spread and conditions on base rate implementation.

Lately, banks have been reporting jumps in profits every passing quarter -- which is good news to shareholders. In the first half of the current fiscal year to January 13 alone, 32 commercial banks recorded net profits of Rs 7.95 billion, up 44.68 percent than in the same period last year.

But at the same time savings and fixed deposit rates of commercial banks are lower than the inflation, which stood at 9.88 percent in the first half of the current fiscal year.

This indicates that shareholders are getting good returns but depositors are losing money, in real terms, by parking funds in banks.

“This practice should come to an end immediately,” Gyawali said. “This, however, should not mean we do not want banks to post higher profits. All we want to do is protect the interest of depositors as well.”

Although commercial banks highly regard the intention of the central bank, they at times are forced to become mute spectators because of the primitive nature of the domestic financial market.

“Ours is not a mature economy and the market does not have the depth and breadth. This bars us from diversifying our investment portfolio and generating returns from other areas,” Anal Bhattarai, the CEO of Commerz and Trust Bank, told Republica.

Currently, banks generate most of their returns from extending loans. They also generate some returns from investment in tools like treasury bills and government bonds.

“For instance, if we are allowed to include investment in commercial papers (a short term debt instrument) while deriving statutory liquidity ratio, then we can get a little bit of space to diversify our investment,” Bhattarai said. “But this is just an example. All we want the central bank to do is open up new investment avenues for us so that we can generate additional returns. This could facilitate in effective implementation of base rate as well.”

Source: Republica