Finance Ministry steps in to tame interest rate

- Rajesh Khanal, Kathmandu

Dec 7, 2018-

The Finance Ministry has formed a panel led by a central bank deputy governor to study the current status of money market and capital market after commercial banks started competing on higher interest rates on deposit. The government move is aimed at taming the interest rate hike.

The ministry on Thursday convened a meeting of the high-level financial coordination committee as interest rates started climbing even after banks were allowed to mobilise half of the budget allocated to local governments.

Finance Ministry officials termed the interest rate war as unusual even when the banks were provided with a fresh source of cash. The decision has given the banks access to around Rs40 billion, said a senior official, adding that banks have increased interest rates by 2.5 percent.

Bankers admit that one of the reasons behind the interest rate escalation is “informal agreement” among the CEOs not to follow the ‘gentleman’s agreement’ on placing a ceiling on interest offers. Nepal Banker Association, the umbrella body of financial institutions, had agreed earlier not to increase the interest rate to an alarming level.

Commercial banks started offering higher interest rates to tide over the shortage of loanable funds that has grappled the banking sector of late. “The fresh interest rate war was basically due to banks’ mismanagement of assets and liability,” said Bhuwan Dahal, the chief executive officer of Sanima Bank. Kumari Bank Limited has offered 13 percent annual interest on fixed deposits, possibly one of the highest rates currently. Machha-puchchhre Bank and Janata Bank have offered annual interests of 12.5 percent and 12 percent, respectively, while many others are also mulling over providing higher interests on deposits.

Ram Sharan Kharel, a senior official at the Finance Ministry, said the ministry was closely monitoring the situation as it could push up the interest rate overall. “Its immediate effect has been seen in the stock market but the entire economy could face trouble if the current situation is not handled deftly,” said Kharel.

The ministry argues that indiscriminate rise in interest rates will make loans costlier, hitting the stock market and the manufacturing sector. Unaddressed, this situation could eventually affect economic growth, ministry official said.

Stock analysts said increased interest rate will affect the stock market as investors, lured by higher rates, will be tempted to sell their stocks from the secondary market which already has a bearish trend.

“This will further diminish stock’s value. At a time when domestic stock market is grappling with the problem in the online trading platform, higher interest rate could further hit the market as Nepse Index has already reached a three-year low,” said Neerab Pudasaini, a stock analyst.

The rising interest rate has made the private sector wary. Issuing a statement on Thursday, the Federation of Nepalese Chambers of Commerce and Industry has urged the Finance Ministry and the Nepal Rastra Bank to intervene for arresting the interest rate growth. “The unusual hike in interest rates will not only hit the investment scenario but also the entire economy,” reads the statement. Rajesh Kaji Shrestha, president of the Nepal Chamber of Commerce, said the banks would attempt to recover their liabilities in the deposited money by raising the interest rate on loans.

“When the return on bank deposits is greater than that from business, it will definitely reduce investment in the manufacturing sector,” Shrestha said.

Published: 07-12-2018 07:32

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