March26: Commercial banks offering advance interest payment for depositors haveprompted concerns among other bankers. They say that such scheme was creating'artificial deposits'.

Fund-starvedNabil Bank Ltd and NIC Asia Bank Ltd last week launched separate schemes onwhich depositors are paid 11 percent interest upfront. Banks can count suchinterest as fresh deposits even though it's not a new deposit.

AfterNepal Bankers Association (NBA) -- the umbrella organization of 28 commercialbanks -- capped the fixed deposit rate at 11 percent, these two banks came upwith a scheme of 11 percent interest rates on one-year fixed deposit, butoffering advance interest payment. This implies that a depositor can get Rs 1.1million while depositing Rs 10 million on the fixed deposit. Depositors canagain deposit this advance interest payment on a separate account and reap thebenefit even without having new fund. 

Thoughthese banks have announced fixed deposit rate of 11 percent, the real rateafter adjustment of advance payment on the scheme stands at 12.3 percent. NBA,which isolated NIC Asia Bank Ltd, earlier for breaching the 'gentlemanunderstanding' on deposit rate cap has kept mum over the new scheme which islikely to trigger competition in the banking industry.“

"Weare discussing the issue (advance payment of interests," NBA PresidentGyanendra Prasad Dhungana, told Republica“ "We look into the practice ofour members that can cause risk in the system." 

However,other banks are at odds with the two banks that have circumvented the'gentleman agreement' on the interest rate cap. According to a source at theNBA, some bankers have criticized the new scheme, stating that such practicewas against the banking norms. “

"Thisis a very wrong practice. It has not only circumvented the agreement but hasalso created duplicate deposits," a commercial bank's CEO said, requestinganonymity. "It is fine as long as they offer interest on daily, weekly ormonthly basis. But by paying interest upfront, they are capitalizing interestto make investment without new stocks of deposit," the CEO added. 

Dueto mismatch in deposit and loan mobilizations, banks are facing shortage oflendable fund. This mismatch has caused the credit to core capital plus deposit(CCD) ratio -- a prudential lending limit -- of many banks to reach to asaturation level. With CCD ratio approaching the 80 percent cap, banks arescrambling to find deposits so that they are in a comfortable to lend. 

NBAcapped deposit rates at 11 percent last month as competition among banks toattract deposits pushed interest rates on deposits to nearly 14 percent.
After NBA ostracized NIC Asia Bank for offering 12 percent interest ondeposits, Nabil Bank last week came up with advance interest payment scheme.NIC Asia Bank followed the suit.

However,Anil Keshary Shah, the officiating CEO of Nabil Bank, has defended the move“."We brought the scheme after we heard that another bank was coming up withsimilar scheme two days later," Shah said. "We will not withdraw thescheme until there is an agreement that none of the banks will increaseinterest rates."

Amidaccusations that the scheme was creating duplicate deposit, the NRB has saidthat they are looking into the matter. "There is no provision as such onadvance interest payment. I can comment on the matter only after holdingdiscussion at the central bank on whether such offer is a breach of the CCDnorms," NRB Spokesperson Narayan Prasad Paudel told Republica.

Source:MyRepublica, 26thMarch  2018