Tuesday 28th of January 2020

Central bank sets maximum interest rate spread at 4.5pc

Kathmandu,Feb 20-Nepal Rastra Bank has directed commercial banks to maintain the spread rate at a maximum of 4.5 percent by the end of the current fiscal year ending mid-July. The central bank issued the directive through its mid-term review of the Monetary Policy released on Monday.

The spread rate is the difference between the interest rates on deposits and loans. Under the new provision, banks have to consider the weighted average of the interest rates on deposits and loans while calculating the spread rate. Earlier, banks used to calculate the interest rate on loans by taking into account the interest rate on their investments in government securities too.

Unveiling the mid-term review of the Monetary Policy for 2018-19, Nepal Rastra Bank introduced the provision amid reluctance by banks to revise the interest rate on loans. In the new provision, all A class financial institutions will have to reach a 4.75 percent spread rate by mid-April. The upper limit for B and C class financial institutions has been set at 5 percent. Development banks and finance companies have to reach this limit by the next fiscal year starting mid-July.

Previously, banks fixed the spread rate by including the lending interest rate, pure cost of funds, cash reserve ratio, statutory liquidity ratio, operating costs and minimum predetermined return on investment, according to Nepal Rastra Bank. Now they can take into account only the interest rate on pure loans while calculating the spread rate.

Narayan Prasad Paudel, spokesperson for the central bank, said the apex institution had revised the policy to reduce the gap in interest rates. “The central bank is working to finalise the modalities of the new provision,” said Paudel, adding that a board meeting on Monday had issued the new rule on the interest rate.

Bankers are not happy with the new system of calculating the spread rate determined by the central bank. “As the net interest is the major source of income for banks, this will definitely hit their earnings,” said Bhuwan Dahal, chief executive officer of Sanima Bank.

Nepal Rastra Bank has allowed banks to set the interest rate on their own, but recently the central bank has come under intense pressure, mainly from industrialists, to reduce the interest rate. Consequently, even Prime Minister KP Sharma Oli directed the Finance Ministry and the central bank a few days ago to intervene in the money market.

Another banker who asked to remain unnamed said the new provision would reduce the profit margin for banks by double digits. “It is not an appropriate decision as the government hears the voice of only the entrepreneurs while disregarding the actual situation prevailing in the financial sector,” he said.

Nepal Rastra Bank has also increased the refinancing loan threshold to Rs50 billion from the existing Rs35 billion. The central bank said it would override the autonomy of banks while fixing the premium margin on loans to be issued to productive and priority sectors. It mentions making it mandatory for banks to issue debentures.

Banks will be allowed to receive foreign currency borrowing equal to their core capital. The central bank has planned to intervene in the interest rate on loans for long-term project financing.

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