Nepal Bankers' Association Ends Long-standing Interest Rate Cartelization, Allows Banks to Set Their Own Rates

The Nepal Bankers' Association (NBA) has taken a significant step by deciding to eliminate the long-standing interest rate cartelisation that has prevailed for a considerable period.

During a meeting attended by the chief executive officers and representatives of all 20 banks under the Bankers' Association, it was unanimously agreed to put an end to the cartelization practices conducted under the guise of a gentleman's agreement.

Starting from the 1st of Shrawan, the responsibility of determining deposit interest rates has been delegated to individual banks. This enables the banks to independently adjust, increase, or decrease interest rates according to the preferences of their respective institutions.

Presently, the interest rate on regular term deposits stands at 9.99 percent. However, banks now have the liberty to increase or decrease it by up to 10 percent. Consequently, if a bank opts to raise the interest rate, it could reach around 11 percent, while a reduction would bring it to approximately 9 percent.

At present, the market possesses approximately Rs. 4 Kharba of investable capital in terms of loan-deposit ratio (CD ratio), with daily increments in deposits.

Due to the surge in deposits but a lack of demand for loans, banks faced pressure to reduce interest rates. Lowering the interest rate on deposits is crucial for reducing the interest rates on loans.

Despite having sufficient liquidity, banks encountered limited loan demand due to high interest rates. In light of this, the association has taken the step to allow individual banks to determine interest rates, asserting that it is the opportune time to open up the interest rate system.

Bankers' cartelization of interest rates faced criticism from various quarters. Dr. Yuvraj Khatiwada, former governor and former finance minister, was quoted as expressing disapproval of cartelization during a public event attended by bankers. Former governors also recommended that the Nepal Rastra Bank (NRB) intervene to eradicate interest rate cartelization.

Finance Minister Dr. Prakash Sharan Mahat voiced his protest against the collusive practice of fixing interest rates by bankers in a recent event. He urged NRB to take action against such practices and advised bankers to abstain from engaging in unethical activities.

Furthermore, most bankers supported the abolition of interest rate cartelization.

Allowing individual institutions to determine their deposit rates and subsequently varying loan interest rates accordingly benefits customers by providing them with more options. "Now everything that was halted is open," a chief executive officer was quoted as remarking.

Commercial banks witnessed a substantial increase in deposits from Rs. 45 Kharba 41 Arba to Rs. 50 Kharba 46 Arba, marking an additional Rs. 5 Khara 5 Arba at the beginning of the year.

However, credit investment has been sluggish compared to deposit growth, with only Rs. 1 Kharba 26 Arba in new loans thus far. The outstanding debt increased from Rs. 41 Kharba 75 Arba at the beginning of the year to Rs. 43 Kharba one Arba.

The notable surge in deposits can be attributed to the rise in remittances and increased government expenditure. With the increase in deposits, the inter-bank rate has decreased to one percent, while the CD ratio stands at approximately 82 percent.