Print Edition - 2018-03-12 | MONEY
NRB mum as NBA acts as regulator
Mar 12, 2018-
The central bank has maintained an awkward silence even as the umbrella body of commercial banks has started functioning as the banking sector regulator, instructing class ‘A’ financial institutions to fix deposit rates as per its prescription.
On Friday, the Nepal Bankers’ Association (NBA), the umbrella body of commercial banks, decided not to conduct any interbank transaction, including foreign exchange transaction, with NIC Asia Bank after the financial institution raised deposit rates beyond the threshold created by the association.
The NBA had told all 28 commercial banks not to raise fixed deposit rate beyond 11 percent and savings deposit rate beyond 8 percent stating further hike in deposit rates would increase lending rates, preventing growth of the private sector as well as the economy.
Although all commercial banks had initially abided by the instruction, NIC Asia later started offering returns of up to 12 percent on fixed deposit and up to 10 percent on savings deposit. After the rates were revised upwards, remaining 27 banks stopped conducting interbank transaction with NIC Asia. Since then, Laxman Risal has stepped down as the CEO of NIC Asia. It is not known whether Risal—who could not be contacted—left the bank due to his inability to enforce NBA’s decision or following completion of his tenure.
The NBA held a meeting on Sunday to discuss issues surrounding the bank. The meeting decided to give continuity to the measure taken on Friday. This practice of imposing decision on other banks, according to many, has turned the NBA into a cartel.
In a market economy, banks like NIC Asia should be free to fix deposit rates on their own. This right has been enshrined in the Banks and Financial Institutions Act. But the NBA decided to infringe on this right claiming “aggressive banking practices of NIC Asia were creating risks in the banking system”.
Had such risks been detected, many say, the central bank should have stepped in. But the Nepal Rastra Bank (NRB), the central bank, is tight lipped about this issue.
“We are still monitoring the situation. And the NBA has told us that it would resolve the issue soon,” NRB Spokesperson Narayan Prasad Paudel said. “So, we will not be making any intervention at this moment.”
Nepal’s banking sector is facing a unique crisis after banks and financial institutions started facing severe shortage of funds that could be disbursed as loans. This had prompted many banking institutions to raise deposit rates so as to attract funds.
“If there is unhealthy competition in deposit collection, interest rates would shoot through the roof, raising the cost of fund of banking institutions,” one banker said on condition of anonymity. “This would pose a threat to the entire banking sector.”
But many bankers fail to acknowledge that shortage of loanable funds was created because of haphazard lending practices of banks in the first quarter of this fiscal year. Banks were lending beyond their limit even at a time when deposit growth rate had decelerated due to fall in remittance income and slow capital spending of the government. This created an asset-liability mismatch, triggering shortage of
Published: 12-03-2018 08:05