The Department of Cooperatives is considering imposing an interest rate cap on loans issued by cooperatives after Nepal Rastra Bank publishes the new monetary policy which is likely to happen this week.

New regulations issued in line with the Cooperative Act 2017 talk about curbing the exorbitant interest rates being charged by cooperatives, in particular, savings and credit and multipurpose cooperatives. The regulations urge the government to set a limit on interest rates.

To this end, the Cooperatives Department formed a nine-member study committee under registrar Tok Raj Pandey which has prepared a draft proposal. The other members of the committee are representatives of Nepal Rastra Bank, Finance Ministry, Nepal Federation of Savings and Credit Cooperative Unions, National Cooperative Federation of Nepal and cooperative associations.

Shashi Lamsal, deputy registrar of the department, said the department was waiting for Nepal Rastra Bank to publish the Monetary Policy 2018-19 before making its move in order to avoid any possible conflict with the document.

The regulations ask cooperatives to maintain the spread rate at a maximum of 6 percent. This is the difference between the interest rate cooperatives charge borrowers and the interest rate they pay depositors. According to the law, cooperatives need to fix the base interest rate by taking the average of the base rate of commercial banks, cooperative banks and cooperative associations and obtaining approval from the central bank or the Ministry of Finance.

The government moved to impose an interest rate cap after many cooperatives got into trouble due to lack of a mechanism to control interest rates. Over the last decade, around 130 cooperatives have been identified as problematic by a commission headed by Special Court Judge Gauri Bahadur Karki.

Most of them were offering interest rates as high as 22 percent on deposits in order to collect funds to invest in the volatile realty sector.

Chitra Kumari Thamsuhang Subba, general manager of the National Cooperative Federation of Nepal, said cooperatives welcomed the new law. According to her, the new provision would reduce risks for depositors.

Analysts said that it would be difficult for the government to enforce the interest rate cap as cooperatives remained largely unregulated. Even the well equipped Nepal Rastra Bank, the regulator of the financial sector, has been struggling to effectively implement the interest spread rate among banks and financial institutions.

The central bank has asked banks to maintain the spread rate at a maximum of 4.5 percent, but many of them have been breaching the norms set by the regulator.

Subba said cooperatives should be given flexibility to fix the interest rate on deposits on their own by putting a ceiling on the lending rate.

There are a total of 34,512 cooperatives across the country with 6.3 million members. Out of them, 13,578 are savings and credit cooperatives that have 3.45 million members. The cooperatives have mobilised deposits totalling more than Rs300 billion.

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