Laxmi Capital News
Banks breach interest rate spread to maximise profit

Commercial banks have breached the interest ratespread to maximise their profits.

The thirdquarter review of the monetary policy has stated that the weighted interestrate spread overshot the regulatory cap of five per cent and stood at 5.46 percent.

Reportedly,Agricultural Development Bank, Nepal SBI Bank and Standard Chartered Bankcrossed the regulatory ceiling of five per cent interest rate spread in thethird quarter.

Interestrate spread was initially introduced to put moral pressure on banks. However,since the last fiscal, Nepal Rastra Bank — the central regulatory and monetaryauthority — started taking action against banks that violated the rule.

Banks haveto allocate the profit generated from the margin that is above the five percent regulatory cap to the interest spread reserve and banks cannot allocatedividends from that reserve, according to Nara Bahadur Thapa, executivedirector of the Research Department of NRB.

Commercialbanks generated Rs 36.26 billion in profit in the third quarter of this fiscalwhich is a growth of 15.45 per cent,  according to the unaudited financialstatements published by them.

Banks havebeen facing public criticism for raising lending rates rampantly to generateprofit. The interest rate spread is a tool to gauge the efficiency of thebanks. Banks that are efficient have less gap between the interest rate oncredit and interest rate on deposits.

Thapa saidthe central bank would take action against banks that have breached theregulatory cap of interest rate spread.

However, thebanks claim that the central bank has calculated the weighted interest ratespread from the difference of the weighted interest rate on credit anddeposits.

But theinvestment made by the banks in the treasury also needs to be counted inweighted average interest rate on deposits and investment (in treasury bills).

As per thethird quarter review of the Monetary Policy, 2017-18, average weighted lendingrate stands at 12.10 per cent whereas the deposit rate stands at 6.64 per cent.Weighted average interest rate in 91-day treasury bills stands at 4.98 percent.

Deposit rateoffered by the banks to depositors is higher than the interest rate that banksearn on treasury bills from the central bank. And the formula of weightedinterest rate spread calculation adjusts the difference of deposit rate andtreasury bills rate, according to Bhuvan Kumar Dahal, CEO of Sanima Bank.

Likewise,the third quarter review of the monetary policy states that commercial bankshave made investment of 21.7 per cent in the priority sector as directed by thecentral bank till the end of the third quarter. Banks have to invest 25 percent of the total loan portfolio to agriculture (10 per cent), hydro-power(five per cent), tourism (five per cent) and export-oriented and micro, smalland medium enterprises (five per cent) by the end of the fiscal year as per theinstruction of the central bank.

Source: TheHimalayan Times, 24th May 2018


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