Bowing down to strong pressure from the Finance Ministry and Nepal Rastra Bank (NRB), commercial banks have agreed to lower their interest rate on deposit.

It was agreed during a lunch meeting between bankers and NRB officials, on Thursday.

The commercial banks had started competing in interest rate to attract deposits, breaching their earlier gentleman’s agreement. 

“As the banks started an ‘unhealthy’ competition to raise interest rate which could adversely affect economic activities, we asked the financial institutions not to raise the interest rate beyond a limit,” NRB Deputy Governor Shiva Raj Shrestha told the Post. 

According to Nepal Bankers’ Association (NBA), banks have agreed to provide maximum of 9.25 percent interest to individual depositors, 8.5 percent to institutional depositors, 6.5 percent in saving deposits and 4.5 percent on call deposits. 

The revised interest rate will come into effect from Friday. 

On December 7, the ministry had formed a panel under NRB Deputy Governor Shrestha to study the impact of soaring interest rate. The panel, in its report submitted on Wednesday, recommends the government to put a cap on the bank interest rate to address problems seen in the money and capital markets.

This comes at a time when the banks are waging an ‘interest rate war’ to woo depositors. Interest rate offered by some banks had gone as high as 13.5 percent in fixed deposit. This had, in fact, created pressure on the interest rate against loan.

Shrestha said the panel suggested putting a cap of two percent on lending interest rate, mainly when the credit is provided in the primary sector.

Ambika Prasad Paudel, chairman of Nepal Investors Forum, who was also a member of the committee, said the panel also recommended the government to allow banks to provide interest rate on deposit based on the prevailing inflation rate. 

“If the recommendation is implemented, banks will be allowed to take an additional two percent points in the official inflation rate in saving deposit. Similarly, banks will have the luxury of charging an additional five percent to saving interest rate as fixed interest rate,” Paudel said. 

The panel has presented 58 points to address the shortage of loanable fund along with the slump in stock exchange market. Ram Sharan Kharel, an official of the ministry, said the government is committed to implementing the suggestions. “For the purpose, the government is planning to sort them out as short term, medium term and long term before devising the related action plans.” 

In addition to putting caps on interest rates, the panel also presented the government with a reform plan for the stock exchange market. It suggested loan against shares in two categories. “Allowing brokering companies to offer the margin lending and banks to issue loan by considering companies’ shares as collateral are among the suggestions,” Paudel said. 

The panel has also sought government intervention to reduce the risk weight in shares to 100 percent from 150 percent previously. It has also suggested increasing the threshold of margin on loan against shares to 65 percent from the existing 50 percent and allowing banks to invest up to 40 percent of their core capital in shares. At present, the central bank has restricted banks to issue loan in shares only up to 25 percent of the core capital. 

The suggestions include allowing foreign capital into the stock exchange market, integrating banks and CDS and Clearing to effectively implement full-fledged online trading system, reduction in commission of stockbrokers, checking insider trading and provision of settlement guarantee fund and investors’ fund.