Inter-Bank Interest Rate Surge as Rastra Bank Faces Resistance from Banks

In a surprising turn of events, banks, involved in inter-bank transactions at a 2.65% interest rate, have demanded over 3% interest from the Nepal Rastra Bank. The demand arose during the Rastra Bank's call for proposals to collect deposits of Rs 20 arba through bidding.

On Thursday, despite the Rastra Bank's current deposit collection rate standing at 3%, banks sought an interest rate of more than 3% to deposit funds, resulting in a collection of only Rs 2.25 arba rupees. This marks the ninth instance of deposit collection by the Rastra Bank, amassing a total of 72.25 arba rupees from banks.

The inter-bank interest rate had plummeted below 1%, prompting the Rastra Bank to initiate deposit collections on the 6th of Mangsir. However, as the Rastra Bank raises funds from the market, the inter-bank interest rate is on the rise once more.

Prakash Shrestha, Executive Director and Head of the Economic Research Department of Nepal Rastra Bank, acknowledged the banks' pursuit of higher profits but emphasized the need to align with deposit collection rates. Shrestha highlighted the importance of maintaining stability above a 3% inter-bank interest rate and urged the Rastra Bank to continue regular deposit collections until this stability is achieved.

Despite the initial setback in deposit collection, Rastra Bank has announced another call for proposals to collect 10 arba rupees through bidding on Poush 1. The focus will be on financial institutions offering lower interest rates.

Former banker Bhuvan Dahal commended the Rastra Bank's efforts to regulate interest rates by consistently collecting deposits from the market. Nepal Rastra Bank officials echoed the sentiment, emphasizing that failing to collect deposits could lead to an undesirable decrease in interest rates, adversely affecting lending, especially in the wake of the ongoing challenges posed by the COVID-19 pandemic.

The Nepal Rastra Bank currently maintains an interest rate corridor of 3 to 7 percent, with the deposit collection rate at 3%, policy rate at 5.5%, and bank rate at 7%. Shrestha suggested that the open market should be actively operated to ensure interest rates remain within the limits set by the Rastra Bank.