Banks unable to cut spread rate: NBA
KATHMANDU, DEC 24 -
Nepal Bankers’ Association ( NBA ) has formally written to the Nepal Rastra Bank (NRB), stating that they are unable to reduce the spread rate of interest to 5 percent.
The central bank has directed commercial banks to limit the spread rate at 5 percent by the end of the current fiscal year. To comply with the directive, banks will have to either offer high interest on deposits if they wish to maintain the interest on loans on the higher side, or charge less interest to borrowers if they wish to offer less interest on deposits.
As of mid-November, the spread rate of commercial banks has remained at 6.93 percent, according to NRB. However, NBA —the association including chief executive officers of commercial banks—has argued that running banks will be difficult if the spread rate is to be brought down.
Earlier, the CEOs had reached a “gentlemen’s agreement” not implement the NRB directive on spread rate. NBA , in its letter sent to central bank’s regulation department, has pointed out seven impacts of the provision and has given one suggestion.
The letter has also been forwarded to the governor, two deputy governors and the NRB’s bank supervision department. In the letter, NBA has said low economic growth and high inflation has made it difficult for them to expand the financial market. On the other hand, operating expenses have increased by 16 percent in last fiscal year 2012-13, it said.
“In this context, a fixed interest rate will have a long-term impact on the banking sector,” the letter states.
It said the provision will affect the banks’ plans to expand services to remote areas and will have negative impact on government-owned banks which are already facing high operating expenses.
Due to a fixed spread rate, the banks many not be able to accept deposits, encouraging capital flight. “The banks will be discouraged to accept deposits amid excess liquidity. This will ultimately encourage capital flights,” the NBA has argued.
Saying that allowing the market to determine the spread rate would help strengthen the market system, control inflation and help maintain liquidity, the association said a fixed spread rate would affect the capital market as the level of profit against capital investment determines whether share investors would purchase bank shares. It said the current fluctuation in the spread rate is “natural”.
NRB Spokesperson Bhaskarmani Gnawali said the spread rate was fixed after the banks failed to honour repeated NRB suggestions on the matter. “The move has been taken to maintain justifiable interest rate for depositors and borrowers,” he said. ‘It can be reviewed only on the ground that whether such a revision would ensure justifiable interest rate.”
(Source: The Kathmandu Post)
