Base interest rate determination
KATHMANDU, OCT 09 -
Bankers have agreed on most of the components to be considered for determining the base interest rate as they get ready to recommend to the central bank to fix it.
The move is an effort to make the interest rate regime more transparent. The base rate is the minimum interest rate on which banks are required to base their lowest interest rate .
Nepal Rastra Bank (NRB) has mentioned in the monetary policy for the current fiscal year that it will set the base interest rate . The base rate will embody components including pure cost of funds, cash reserve ratio (CRR), statutory liquidity ratio (SLR), operating cost and minimum predetermined return on investment, according to NRB.
Bankers said that they had agreed to all the components except return on investment. “We are discussing whether to incorpo rate return on equity or return on assets within return on investment,” said a banker. He added that banks had different views on the matter. These components were suggested by the central bank itself. Some bankers have demanded including the cost of 1 percent loan loss provision on good loans in the base rate .
While calculating the cost associated with these components, bankers said that the base interest rate might be around 4 percent higher than the cost of funds of a particular bank if the provisioning for possible loan loss is incorpo rate d as cost. “In our suggestion, we have proposed assigning 2 percent for operating cost, 1 percent for provisioning for possible loan loss and 50 basis points each for CRR and ROA,” said a CEO of a commercial bank.
Nepal Bankers ’ Association (NBA) president Ashoke Rana said the association would be sending its proposal on the base interest rate to the central bank by Friday. He added that they were yet to reach a conclusion on the base rate . “We are collecting suggestions from all the commercial banks individually,” said Rana. The central bank is mulling introducing the base rate by mid-November.
NRB is yet to calculate what could be the possible base rate for different banks. “The cost depends on the operational efficiency of a bank which differs with each bank,” said a central bank official. “Therefore, it is too early to determine the base rate .”
The above components were suggested by the central bank as they involve the cost for banks. Commercial banks are required to maintain 6 percent of their CRR at NRB which means that the cash stays idle in the central bank’s vault. Likewise, they have to maintain 15 percent of the SLR by investing in low yielding government treasury bills and bonds and keep cash reserves with themselves.
“While complying with such mandatory requirements, banks have to sacrifice their return and they are regarded as costs,” said a senior NRB official. “Hence, we have asked them to consider such costs.”
Source: The Kathmandu Post
