Nepal Bankers´ Association has executed an ´informal gentleman understanding´ among all 27 commercial banks to limit deposit interest rate at 12 percent - a move some experts believe as against the spirit of liberal economic policy.

A banker, preferring to be unnamed, informed Republica that a meeting of Nepal Bakers´ Association (NBA) took the decision some two weeks back to deal with growing competition among commercial banks in attracting deposits by offering higher interest rates.

Justifying the decision, the bankers said the NBA was forced to take the decision to avoid possible spiral of unhealthy competition of offering more and more interest rates to attract additional deposits that, if unstopped, will ultimately take entire banking industry toward disaster.

The banker further elaborated possible impending risks and said that the interest rate on one year deposits would have reached around 15 percent had such arrangements not been implemented.

"If the banks are compelled to take deposits at 15 percent, they will have to invest them in above 20 percent. Most of the businesses will become economically unviable at that lending rates," he said. However, he was quick to add that such arrangement will be applicable only for a short period of time, as it doesn´t incorporate other players like development banks and finance companies which are already offering interest rates higher than the limit.

Another banker, however, said the understanding is unlikely to remain in place as it is not in the interest of new banks. "If all the banks offer the same deposit rate, it will be difficult for the new banks to attract new depositors because all will go to established banks," he said, requesting anonymity.
The banker further said that both the Finance Ministry and Nepal Rastra Bank have already been informed about the decision and that both the institutions have quietly supported the move.

NBA president Sashin Joshi defended the decision and said that such decision was necessary to stop a looming vicious upward spiral of deposit interest rates that could take the lending rates to a level where no one can afford. "We have just tried to keep the deposit interest rate equal to prevailing inflation rate," he said.

Joshi further said that the understanding will not be in place for a long period as the liquidity situation has already improved.

NBA vice president Rajan Shingh Bhandari said that the decision was necessary to maintain borrowers´ confidence that was eroding fast due to rapid rise in lending interest rates. "Not only was the decision aimed to tackling weakening investors´ confidence, it was also to ensure adequate flow of credit to the economy," Bhandari said. He also informed that the banks have agreed to keep the interest rates on deposit between 11-12 percent.

However, experts have opposed the decision, labeling it as an attempt to reverse more than two-decade long liberal policy, allowing market forces to set both lending and deposit interest rates.

"If that is the case, then the decision not only is against the spirit of liberal economic policy but also limits customers´ interests as it squeezes competitiveness in the banking industry," said Dr Ram Chandra Bhattarai, associated professor of Tribhuvan University.

courtesy:myrepublica, May 13,2010