Banking industry not still free from shortage of investable capital? NBA still imposes gentleman’s cap of 8 & 11% on interest rate; younger banks dissatisfied with big brothers

Nepal Bankers Association (NBA) has decided to continue its earlier cap on interest rate on fixed and saving deposit rates. The decision taken by the meeting of NBA held on Monday comes despite recent reports that the shortage of lendable fund has eased in recent days. 

Though bank and financial institutions (BFIs) are observing a rise in deposits in recent days, the decision of the NBA to stick with the interest cap on deposit restricts its member banks to review their interest rates. The deposit rate cap, which goes against the competitive market behavior, has been criticized as 'interest cartel' of banks.

Earlier in January after banks started to compete to hike rates for attracting deposits following acute shortage of lendable fund, the NBA fixed deposit rate at 11 percent and saving rate at 8 percent. NIC Asia Bank Ltd had to face a backlash after it breached the cap and decided to offer higher deposit rates. But, then it was compelled to withdraw the scheme after the NBA outcasted the bank by deciding that its remaining 27 member banks would suspend interbank transactions with NIC Asia. 

However, NBA leaders say that the decision of the organization to fix interest rate cap is a 'general understanding' among bankers to prevent runaway rate hikes. 

WB calls it ANTI-COMPETITIVE BEHAVIOR

Meanwhile, the World Bank has termed the decision to cap the interest rate an example of 'anti-competitive' behavior. 

In its recent 'Nepal Development Update' released last week, the World Bank said that the move of the NBA to fix interest rate at a certain level is promoting 'anti-competitive' behavior among banks. 

In conflict with young banks:

Moreover, it was also known that the small commercial banks have expressed their dissatisfaction over the bigger banks to keep the interest rate in captivity. Those younger banks have reportedly complaint that the unchangeable interest rates have given ample opportunities for the big investors as well as the institutional investors to park their money with few reknown and well-established banks. Such a practice, according to the bankers from smaller banks, have eroded the competitiveness of their younger banks as the big investors would naturally choose the banks with bigger brand names than the new ones to park their money when the interest rates offered by all these banks are nearly same.