Base rate of class 'B'‚ 'C' FIs above 10pc

KATHMANDU:

Development banks and finance companies have started publishing their base rates with some of them reporting a base rate as high as 14 per cent.

The base rates of national level development banks and finance companies range from 10 to 14 per cent. National level class ‘B’ and class ‘C’ financial institutions are required to publish their base rates in the unaudited financials for the second quarter.

According to the published financials, Jyoti Bikas Bank’s base rate stands at 10.28 per cent and City Development Bank’s is at 11.08 per cent. Likewise, the base rate of Om Finance is at 11.25 per cent and that of Prudential Finance is at 13.94 per cent.

On the other hand, average monthly base rate of commercial banks stands at 8.86 per cent till mid-December 2013. The average base rate of class ‘A’ banks had stood at 9.38 per cent in mid-January 2013.

“It is obvious that the base rate of development banks will be higher than that of commercial banks because our cost of fund is a bit higher than that of class ‘A’ banks,” pointed out president of Development Bankers’ Association of Nepal Krishna Raj Lamichhane.

The central bank had introduced the concept of base rate in November 2012. Nepal Rastra Bank had imposed the base rate calculation on commercial banks back then to make their

interest rate regime transparent. Back in September, national level class ‘B’ and ‘C’ financial institutions were mandated to publish their base rate, as mentioned in this fiscal year’s monetary policy.

This rate provides a referential floor for lending rates charged by banks. The central bank has asked financial institutions to calculate it based on cost of fund, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), operational cost and Return on Assets (RoA).

“Since we have to offer marginally higher interest for deposits in comparison to the commercial banks, our base rate is higher,” he pointed out.

The base rate is not a mandatory floor for the lending rate but only a referential rate. A lower base rate reflects the capacity of financial institutions to lend at a lower rate.

“However, it is not necessary that all development banks are charging higher interests than commercial banks. Some might also be providing loans at lower rates. It depends on the particular institution,” said Lamichhane, who is also CEO of Kailash Bikas Bank.

NRB had considered that publishing the base rate will compel financial institutions that are charging higher interest for loans but offering minimal deposit rate to lower the lending rate or increase the deposit rate.

However, of late, surplus liquidity in the financial system has brought down the interest rates for deposits. The base rate does not seem to contribute in containing extreme spikes in liquidity and consequently reduce short-term volatility of the interest rates.

Source: THT