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NBA scraps interest rate cap on individual fixed deposits

2018-12-05

Nepal Bankers Association (NBA) has scrapped the interest rate cap on fixed deposits for individual depositors. 

The meeting of the NBA held in Kathmandu on Tuesday decided to remove the 10 percent interest rate cap on fixed deposits for individual depositors. Banks were allowed to raise such rates by up to one percentage points. 

The NBA’s new decision means commercial banks are now free to fix interest rates for individuals who park their money in fixed deposit schemes.

However, the NBA has given continuity to the interest rate cap of 7 percent on savings deposit. Similarly, no change has been made on the upper limit of 11 percent interest rate on institutional deposit.

“By allowing banks to decide interest rate on fixed deposit for individuals, we have tried to give a playing field for some banks that could not compete for institutional fixed deposit,” Gyanendra Dhungana, the president of the NBA, told Republica. 

Some of the banks, particularly youngest banks, are reportedly feeling pressure due to the shortage of lendable fund after their CCD ratio breached the regulatory limit. They are facing the shortage of deposits as institutional depositors choose to park their deposits in older and bigger banks as banks offer more or less the same interest due to the cap.

The decision of the NBA is aimed at providing a respite to those commercial banks whose credit to core capital plus deposit ratio is breaching the regulatory limit of 80 percent. 

Banks breaching 80 percent CCD ratio of the central bank face punitive action of the central bank. Most of the commercial banks are near the upper limit of the CCD ratio. 

According to Narayan Prasad Paudel, the spokesperson for the central bank, the average CCD ratio of 28 commercial banks as of Sunday stands at 77.4 percent. 

“The CCD ratio of two commercial banks has crossed 80 percent on a daily basis. However, we impose penalty on the breach of CCD ratio on monthly basis,” added Paudel, declining to give the name of those banks.

With the removal of the interest rate cap on individual fixed deposit, some worry that the banking industry may face interest rate competition to lure fresh deposits. Such rise in interest rate is likely to increase the base rate of banks which causes the lending rates to surge. The interest rates have remained stable in recent months after going through the roofs following the intervention of the NBA. 

The decision to fix cap has been widely criticized as interest rates cartel of NBA. A report of the World Bank last year has called the move ‘anti-competitive’ behavior of banks.

Source: My Republica