At a time when banks are facingchallenges related to credit crunch, Nepal Rastra Bank (NRB) — the centralregulatory and monetary authority — is preparing to issue a circular to thebanks and financial institutions (BFIs) to stick to the published interest ratefor institutional depositors for at least a quarter (three months).

Banks can opt for up to 50 percent of the deposit from institutional depositors. Citing the unhealthycompetition among banks to attract institutional deposits, a high-rankingofficial of NRB said that the central bank is mulling over barring banks fromraising or cutting the interest rate on institutional deposits in less thanthree months.

Due to high weightage ofinstitutional deposits, lending rates are also fluctuating along with frequentchanges in the interest rate of institutional depositors. Though BFIs cannotchange the interest rates on loans in less than three months, as per the NRBrules, there is no rule for regulating interest rates on deposits.

According to the central bank’srule, banks have to publish their base rate every three months and they canchange the interest rates at three-month intervals based on the changes in thebase rate. Base rate is calculated on the basis of expenses incurred by theBFIs to collect deposits, plus 80 per cent of the bank’s overhead expenses(salary and rent), plus up to 0.75 per cent profit. If a bank’s returns ongovernment securities is lower than their deposit collection rate, they can addthe shortfall in the base rate.

Banks have been facing acutecrisis of loanable funds as almost all, except government-owned RastriyaBanijyaBank (RBB), disbursed loans up to the permissible credit to core capital cumdeposit (CCD) ratio. Banks are allowed to disburse loans of up to 80 per centof the sum of deposit and core capital and the average CCD level of banks. Whenremoving RBB from the list the average calculation of CCD stands at 79 percent, according to Nepal Bankers’ Association.

Banks have been seekingstimulus from the government to tackle the current crisis. Banks areapprehensive that the situation will further worsen as around Rs 35 billion toRs 40 billion is expected to be withdrawn from the banking channel in theimmediate future as the first tranche of income tax (40 per cent of annualincome tax) needs to be filed by mid-January.

Source: The Himalayan Times, 3^rd January 2018