The Nepal Rastra Bank (NRB), the banking sector regulator, has barred banks and financial institutions from accepting fixed institutional deposits by deviating from published rates for a period of at least three months.

The move was taken after some of the banks and financial institutions were found reducing or increasing the interest on fixed institutional deposits within days of publishing their rates, according to NRB Spokesperson Narayan Prasad Paudel. This had triggered unhealthy competition among banking institutions to attract institutional deposit.

Big institutional depositors, like Employees Provident Fund, Citizens Investment Trust and Nepal Telecom, park their funds in banks and financial institutions through competitive bidding process.

Under this process, banks and financial institutions that offer highest rates bag the funds up for grabs. Banks and financial institutions are currently allowed to add a premium of two percentage points to published interest rates when collecting deposits from big institutional depositors.

But some of them have been found increasing these rates rampantly whenever there is shortage of funds, forcing others to follow suit. This has caused institutional deposit rates to soar, raising the cost of fund of banking institutions.

“From now onwards, banks and financial institutions cannot change institutional fixed deposit rates that is once published for a period of three months,” says a directive issued by the NRB on Sunday.

In the meantime, the NRB has also allowed depositors to deposit funds in their account through another bank. This means depositor of, say, Bank ‘A’ can now visit Bank ‘B’ to deposit funds in his account in Bank ‘A’. (PR)