Central bank, bankers at odds on lowering lending rates
Nepal Rastra Bank and bankers have expressed opposing views on lowering lending rates at a time when the borrowers are expecting the lending rate to go down along with the interventions through Monetary Policy of this fiscal.
The Monetary Policy has made various interventions to ease the perennial challenge of loanable fund crisis caused by sluggish deposit growth against the rapidly surging demand of credit.
Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal today urged the banks to bring down their lending rates as the central bank has slashed the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) through the Monetary Policy, which were aimed at facilitating the banks to bring down the base rate. Moreover, the deposit collection of banks has increased substantially along with the rise in government expenses at the end of previous fiscal.
“The central bank has mopped up Rs 93.25 billion from the market since the beginning of new fiscal (in the last three weeks) to hook the short-term interest rate like interbank rate and treasury bills rate within the interest rate corridor introduced by the central bank,” said Governor Nepal.
CRR is the fund that financial institutions have to deposit in the current account of the central bank and henceforth the BFIs can get certain interest rate by investing liquid asset in the government securities, which is expected to bring down the base rate. However, base rate of 15 commercial banks out of 28 in operation stood at double digits.
Some of the banks have increased the base rate since beginning of this fiscal. Base rate is calculated on the basis of expenses incurred by the bank and financial institutions to collect deposits, plus 80 per cent of its overhead expenses (on staff and rent), plus up to 0.75 per cent profit. If a bank’s returns on government securities is lower than its deposit collection rate, it can add the shortfall in the base rate.
Flushed with liquidity?
Speaking at a programme titled ‘Understanding the NFRS compliant financial statements and regulatory challenges of NFRS implementation’ held here today, Governor Nepal said that the market is flushed with liquidity, but the banks seem reluctant to bring down the lending rates.
He further stated that the NRB has faith that the banks will bring down the lending rates themselves, but that the central bank will be forced to take action if they fail to do so. “We do not want to act like the police in trying to ensure that the banks are following the rules,” the governor reiterated.
To address the situation of credit crunch, which has been witnessed since two consecutive fiscal years, the central bank has not only opened the facility for commercial banks to borrow from the foreign banks in convertible foreign currency and also in Indian currency. It has also provided the facility of forward contract or hedging, which means that the fluctuation of exchange rate will be covered by the central bank’s hedging facility.
“Banks cannot keep the interest rate high by creating the situation of credit crunch,” the governor asserted. “They must try to bring in funds from abroad if the deposit collection in the country is insufficient.”
The governor further stated that the Monetary Policy has brought down the financial intermediation cost or interest rate spread of the banks to 4.5 per cent from five per cent for the benefit of the borrowers. Apart from lowering the lending rates, the move also aimed to allow banks to mobilise funds through issuance of bond/debentures and the funds collected from such instruments could be calculated in credit to core capital cum deposit ratio from 2018-19.
According to Nepal, all these steps were taken to bring down the lending rates so that the private sector could avail more credit from financial institutions, which will ultimately support in spurring economic growth.
Passing the buck
However, Gyanendra Prasad Dhungana, president of Nepal Bankers’ Association, claimed that the base rate of the banks is unlikely to come down any time soon, as the cost of operation of the banks has increased significantly.
He pointed at the instruction of the central bank requiring BFIs to open branches in each local unit – where potential of business is low – for raising the operational cost of the banks.
Dhungana further said that the compliance cost (abiding by the regulatory and international norms in the financial sector), like the banks required to prepare the financial statements as per NFRS (Nepal financial reporting standards), conduct full audit of major branches, cross-verification of financial statements with tax office, among others, and expenses in technologies and risk-control have also increased.
Dhungana asked the central bank to consider all these aspects before pointing fingers at the banks for keeping lending rates high.
While the central bank and bankers engage in the blame game, the private sector representatives worry about the deteriorating business climate owing to sky-rocketing lending rates.
Shekhar Golchha, senior vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI), alleged that banks are passing the cost of their inefficiency and lavish expenses onto the borrowers and the central bank has also just been acting like a talking shop.
“Banks are not serious about bringing down the lending rates as the central bank has been acting like a toothless tiger all this time,” he claimed. “Whereas it should have intervened long time back, the total disinterest shown by the central bank has been adversely affecting the economy.”
Source: The Himalyan Times