KATHMANDU, JAN 21. 2013
The deposit interest rate, that is already painfully low, is expected to further decline as banks now are under pressure to maintain lower base rate.
At present, only a few banks have published the base rate which is above 10 per cent.
Commerz and Trust Bank has fixed 10.14 per cent as base rate, Grand Bank 10.49 per cent, and Kist Bank 11.12 per cent. These banks are providing a maximum of six per cent interest on savings deposit.
The base rate is calculated based on cost of fund, Cash Reserve Ratio, Statutory Liquidity Ratio, operational cost, and return on assets. Since the major expense of banks is on paying interest for deposits, slashing the deposit rate is the easiest measure to pull down the base rate.
The application of a base rate is supposed to make the interest rate regime of the banks transparent as it provides basic referential floor for lending rates charged by the banks.
“Banks with higher base rates will definitely feel the pressure to lower their operation cost in order to improve their competitiveness which might affect the deposit interest rate,” pointed out spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.
“The nature of the movement of interest rates is cyclical. The forces of demand and supply make the interest rate go up and down, but eventually market forces bring the balance back,” Gyanwali added, referring to the fluctuation in the rate in the current decade.
Interest rates had gone high in 2010 as the liquidity crunch hit the banking sector. The liquidity shortage in the financial system had pushed the deposit interest rate for savings to as high as 12 per cent and lending had reached 20 per cent.
However, since the liquidity situation started to ease, deposit rates have also plunged while lending rate has not gone down accordingly.
NRB had introduced the concept of base rate that provided banks a reference rate for determining lending rates back in November compelling them to make their interest structure transparent. Banks had to publish the base rate obtained by the formula provided by NRB starting mid-January.
As the base rate will be public, those banks whose cost of funds are lower will have to justify the high lending rate, while banks with higher base rate will have to efficiently manage their cost in order to bring down the base rate, Gyanwali added.
Though a base rate is only indicative as the banks can charge lower interest if it is prudent, the general public will have an inclination towards those banks that may provide loans at a lower rate.
“Though the base rate concept is beneficial for the banking sector as a whole, it might further demarcate the banks into older and comfortable, and the new and struggling ones,” said chief executive of a commercial bank.
“Moreover, this is an acid test for the relatively new banks that are trying to establish themselves and have to expand their deposit base, but at the same time they will have to lower deposit rate to manage rising cost of fund, and they will have to be innovative,” added the banker.
Earlier, Nepal Rastra Bank had decided to make the base rate a mandatory floor for the lending rate. However, in its final directive, it did not make it obligatory because new banks would have to charge higher lending rate as their base rate would have been higher than the already established ones.
Source: THT
The deposit interest rate, that is already painfully low, is expected to further decline as banks now are under pressure to maintain lower base rate.
At present, only a few banks have published the base rate which is above 10 per cent.
Commerz and Trust Bank has fixed 10.14 per cent as base rate, Grand Bank 10.49 per cent, and Kist Bank 11.12 per cent. These banks are providing a maximum of six per cent interest on savings deposit.
The base rate is calculated based on cost of fund, Cash Reserve Ratio, Statutory Liquidity Ratio, operational cost, and return on assets. Since the major expense of banks is on paying interest for deposits, slashing the deposit rate is the easiest measure to pull down the base rate.
The application of a base rate is supposed to make the interest rate regime of the banks transparent as it provides basic referential floor for lending rates charged by the banks.
“Banks with higher base rates will definitely feel the pressure to lower their operation cost in order to improve their competitiveness which might affect the deposit interest rate,” pointed out spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.
“The nature of the movement of interest rates is cyclical. The forces of demand and supply make the interest rate go up and down, but eventually market forces bring the balance back,” Gyanwali added, referring to the fluctuation in the rate in the current decade.
Interest rates had gone high in 2010 as the liquidity crunch hit the banking sector. The liquidity shortage in the financial system had pushed the deposit interest rate for savings to as high as 12 per cent and lending had reached 20 per cent.
However, since the liquidity situation started to ease, deposit rates have also plunged while lending rate has not gone down accordingly.
NRB had introduced the concept of base rate that provided banks a reference rate for determining lending rates back in November compelling them to make their interest structure transparent. Banks had to publish the base rate obtained by the formula provided by NRB starting mid-January.
As the base rate will be public, those banks whose cost of funds are lower will have to justify the high lending rate, while banks with higher base rate will have to efficiently manage their cost in order to bring down the base rate, Gyanwali added.
Though a base rate is only indicative as the banks can charge lower interest if it is prudent, the general public will have an inclination towards those banks that may provide loans at a lower rate.
“Though the base rate concept is beneficial for the banking sector as a whole, it might further demarcate the banks into older and comfortable, and the new and struggling ones,” said chief executive of a commercial bank.
“Moreover, this is an acid test for the relatively new banks that are trying to establish themselves and have to expand their deposit base, but at the same time they will have to lower deposit rate to manage rising cost of fund, and they will have to be innovative,” added the banker.
Earlier, Nepal Rastra Bank had decided to make the base rate a mandatory floor for the lending rate. However, in its final directive, it did not make it obligatory because new banks would have to charge higher lending rate as their base rate would have been higher than the already established ones.
Source: THT
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