Bankers on Tuesday said that they had started issuing loans in proportion to their deposit collection in order to reduce interest rate volatility. Entrepreneurs have lately been blaming banks for raising interest rates rampantly while curbing credit disbursement. 

“Currently, the problem is not actually with liquidity, but with loanable funds,” Anil Keshari Shah, president of the Nepal Bankers’ Association, told an interaction organised by the Nepal Chamber of Commerce on Tuesday.

Referring to a shortfall in loanable funds, banks in the past few weeks have been raising lending rates and, in some cases, doubled them. On the other hand, a number of banks have also started offering interest rates of up to 12 percent on fixed deposit schemes. 

Shah said there was a need for controlling the growth rate of loans in order to maintain stability in interest rates. “Although an increase in deposits along with an increase in government spending is essential to ease the present problem, banks have started curbing loans to address the present problem themselves.”

Saroj Kaji Tuladhar, president of the Nepal Financial Institutions Association, said the unhealthy competition that has emerged in deposit interest rates had led them to increase the interest rate on loans. 

“In order to receive more benefits from the higher interest rate that alternative banks offer, many depositors have been taking loans even against fixed deposits at one bank to benefit from the difference in interest rates,” Tuladhar said. 

He also blamed Nepal Rastra Bank's (NRB) policy of increasing the capital base of financial institutions for the ongoing problem. “If the number of banks and financial institutions are reduced significantly through mergers, the possibility of cartels will be higher.” Krishna Raj Lamichhane, president of the Development Banks’ Association, urged banks not to look for higher profits in the name of increasing the capital base of their institutions. 

He blamed bank owners for pressurising bank executives to increase profits so that they can receive handsome dividends. “As a result, bank management has been compelled to raise the interest rate on loans,” said Lamichhane. 

Traders have accused banks of being engaged in a cartel to increase the interest rate. According to them, banks should revise their business plans instead of passing on their burden to traders. 

“Showing unjust reasons like providing excess loans to hire purchase in the last six months, banks have created an artificial shortage just to increase the interest rate,” said Sundar Dahal, a trader.Meanwhile, NRB claimed that the situation had improved lately due to its intervention. “Banks collected deposits totalling Rs71 billion and issued loans amounting to Rs15 billion in the last two weeks,” said NRB Governor Chiranjibi Nepal.