WB suggests NRB to reconsider cap on spread rate

KATHMANDU, April 10 :

The World Bank (WB) has said the Nepal Rastra Bank (NRB) should reconsider its proposed cap on spread rate.

Spread rate is the difference between borrowing and lending rates of banks and financial institutions. The central bank has asked BFIs to cap spread rate at 5 percent from the coming fiscal year.

Officials of the World Bank on Wednesday said the banking sector regulator should find other ways to regulate the market instead of fixing spread rate which has discouraged the banks from increasing their investment as well as bringing new banking products.

The half-yearly report of the World Bank named ´Time to Refocus´ says while credit to private sector remains high, rate of credit growth has decreased significantly from the beginning of the current fiscal year.

“Large interest spread between risky assets and low risk assets is significant, indicating reluctance from banks to use the price mechanism to attract greater demand for loanable funds,” the report reads.

The BFIs are doing international preparation to limit their spread rates below 5 percent.

The report says NRB should come up with clear monetary stance to address structural excess liquidity for the long run. “Likewise, NRB, in the short run, should closely monitor the evolution of bank balance sheets and stand ready to tighten monetary policy,” it said.

Banking sector is increasingly holding liquid assets rather than supporting productive investment through lending though BFIs are said to have liquidity excess of more than Rs 70 billion at present.

Aurelien Kruse, senior country economist of World Bank, said NRB should be explicit about two sets of risks that the proposed cap on the interest rates spread could create for financial sector stability and access to finance. He said the spread rate cap is likely to induce banks to reduce their exposures to sectors that carry higher interest rate. Kruse also said that the sectors of Small and Medium Enterprises (SMEs) and long-term finance are likely to be affected by the cap.

These two sectors are currently under-served by the country´s banking system.

The better managed banks will be able to comply with the cap policy but more fragile BFIS may come under stress, the report said.

Source: Republica