Nepal Rastra Bank to order BFIs to cut disparity in interest rates

NEPAL Rastra Bank (NRB) is planning to issue a directive ordering banks and financial institutions (BFIs) to keep difference of interest rates on a particular category of loans within a certain limit. The policy is directed at removing the wide disparity in interest rates on loans of a similar type. The central bank’s move follows a provision in the new monetary policy which states that the difference in interest rates on loans and deposits, service charges, commission rates, fees and fines should be kept at a “justified” level. “The directive on a number of those components will come within next week, and it may take one to two months more for issues which require more work,” said NRB spokesperson Bhaskar Mani Gnawali. He added that the central bank was yet to determine the maximum difference in interest rates it wants to permit. Chief of the research department of the central bank Min Bahadur Shrestha said that NRB formulated the regulation after receiving complaints that a number of banks had been charging widely varying rates of interest from different borrowers for the same types of loans. However, Commerz and Trust Bank Nepal CEO Anal Raj Bhattarai said such a policy would not be practical as the difference of interest rates is maintained based on the risks associated while lending to particular borrowers. “It will definitely discourage lending,” he added. NRB has already directed BFIs to keep the maximum difference in interest rates on savings deposits at 2 percent, and will implement a similar provision for other types of deposits too. “We will direct BFIs to keep the difference between interest rates on similar fixed deposits and other types of interest-earning deposits of a similar nature at a certain level,” said Shrestha. Implementing the policy in other types of deposits will not have impact as much as while imposing in saving deposits, according to bankers. “Banks usually don’t offer different fixed deposit products of same repayment deadline,” said Bhattarai. Meanwhile, NRB has also planned to bring uniformity in the fees, commission rates and fines taken from customers after receiving a number of complaints. “We received a complaint that one bank was charging a pre-payment penalty of 4 percent for repaying a loan ahead of schedule. This is too high,” said Shrestha. He added that the central bank had received another complaint that a bank was charging Rs 5,000 for closing an account. NRB has also inserted a provision in the monetary policy that BFIs will be directed to bring the spread rate to 5 percent within a certain period. The spread rate is the difference between interest rates on deposits and loans. The average spread rate in the last fiscal year was 7.1 percent, according to NRB. This directive will force BFIs to lower the interest rate on credit or increase the interest rate on deposits thus benefiting customers. The central bank has also asked BFIs to maintain the portfolio of institutional deposits at less than 60 percent of their deposits. “It is not possible for newer banks to keep institutional deposits below 60 percent as they don’t have adequate branches to receive more individual from,” said Bhattarai. “The NRB’s policy is guided by the motive of forcing us to go for merger.”