Base rate on lending before Tihar
KATHMANDU, OCT 30 -
The Nepal Rastra Bank ( NRB ) is all set to introduce base rate on lending before Tihar. The provision is expected make the interest rate regime transparent, enabling borrowers to switch to banks and financial institutions (BFIs) that make the best offer.
Base rate is the minimum interest rate that banks should charge on lending. Once in place, banks would not be allowed to extend loans to borrowers below the base rate. Also, a lending rate below the base rate will be infeasible for banks as it is determined based on the entire cost of funds.
The central bank had initially planned to introduce the provision before Dashain.
The Nepal Bankers’ Association (NBA) has already submitted its suggestions to the central bank. NRB is also responding positively to NBA’s request that older loans should be exempted from the base rate.
NRB Deputy Governor Maha Prasad Adhikari said base rate would not affect loans that were priced before the introduction of the provision. “The provision will come into effect while renewing or restructuring of such loans,” said Adhikari. “We decided this as it would be unfair to hike interest rates on loans issued before the introduction of the system.”
The central bank has also decided that the effective base rate for consortium loans will be the average of the base rate of all consortium banks, according to a senior official at NRB . NBA, in its official letter to NRB , had also asked the latter be to be clear on application of the base rate on consortium loans.
Also, the bankers have asked that the central bank allow them to calculate the cost of funds on quarterly basis rather than the annual basis asked by NRB in the template it had sent. “If the cost of funds is calculated on annual basis, the base rate of some of the commercial banks might exceed 15 percent,” said a CEO of a commercial bank.
However, the central bank is yet to decide whether to allow banks to calculate the cost of funds on quarterly basis. “But it is more likely that we will allow banks to do so,” said the NRB official. “If the cost of funds is not adjusted in optimum duration, the base rate will not be in line with the actual cost of funds.”
NRB had formally announced to introduce the provision in its monetary policy in order to make lending of commercial bank transparent. However, the regulator formally invited bankers to discuss the issue only after mid-September. During the meeting, NRB gave bankers a tentative idea and variables to be considered while calculating the base rate.
According to NRB , bankers have been asked to consider the cost of funds, cash reserve ratio, statutory liquidity ratio, operating cost and minimum predetermined return on investment before calculating the base rate.
Source: The Kathmandu Post
