Doing away with the gentlemen’s agreement, banks have decided to set the interest rate themselves. Breaking the long-standing interest rate cartelization practice, the meeting of the Nepal Bankers Association (NBA) on Thursday decided that it was the right time to let the banks decide the interest rate.
Till now, commercial banks used to determine the interest rate as per the decision of the NBA. Now, the NBA decision is not required to fix the interest rates. They (banks) can determine the interest rate of deposits and loans every month based on their requirements.
With this, interest rates from the new fiscal year that begins on July 17 will vary from bank to bank. With the banking system having investable funds above Rs 400bn, the majority of commercial banks are preparing to reduce interest rates on deposits in Shrawan (mid-July to mid-August)
Santosh Koirala, Vice President of the NBA and Chief Executive Officer (CEO) of Machhapuchhre Bank, said that they have decided to allow the banks to determine interest rates. “With Thursday’s decision, banks will be able to determine interest rates in their own way from mid-July,” said Koirala.
According to Everest Bank CEO Sudesh Khaling, Thursday’s decision will end the unhealthy competition in the market. “There was unhealthy competition in the market when all banks had the same interest rate. Now the deck has been cleared for banks to fix the interest rate based on their requirement,” he said. “And, customers can go to their preferred bank to conduct their banking transactions.”
However, banks have to follow the parameters set by the Nepal Rastra Bank (NRB) while fixing the interest rates. As per NRB’s guidelines, banks and financial institutions can reduce the interest rate up to 10 percent.
Commercial banks had decided to keep the deposit interest rate unchanged for the month of Ashad (mid-June to mid-July). Since the regulatory provision allows the banks to reduce interest rates by 10 percent, the interest rate on fixed deposits can come down to nine percent in Shrawan from the current 9.99 percent.
Currently, the banking system has deposits amounting to Rs 5,736bn, while loans totaling Rs 4,854bn. Since Baisakh, the banking system has collected Rs 242bn in deposits. In the first three weeks of Ashad (the last month of the fiscal year), Rs 147bn in deposits have been added to the banking system. With the improvement in liquidity, the CD ratio currently stands at 82.11 percent. Banks can provide loans with a CD ratio of up to 90 percent.
With the liquidity position becoming easier, the interbank interest rate has also decreased. The interbank interest rate has come down from seven percent during the review period to 1.36 percent.
After reducing the deposit interest rate in Baisakh (mid-April to mid-May), the NBA, the association of CEOs of commercial banks, decided to keep it unchanged for the month of Jestha (mid-May to mid-June).
In Baisakh, under huge pressure from the private sector, NBA lowered the deposit interest rate to 9.99 percent for individual depositors. Similarly, the interest rate for institutional deposits was lowered to 7.99 percent from nine percent.
