August 4: A few years ago, Nepal Rastra Bank (NRB) had adopted a policy to bring down the interest rates of banks to single digit. But now, the central bank is encouraging banks and financial institutions to increase the interest rates.
Issuing a directive to implement the provision included in the monetary policy for the current fiscal year, NRB has allowed BFIs to change the interest rates as per the instruction of the central bank.
Amending the Unified Directive 2078 on Wednesday, the central bank has given permission to the BFIs to change the interest rate with immediate effect whenever the central bank changes the bank rate and the policy interest rate.
The central bank had announced to increase the policy interest rate through the monetary policy in order to discourage credit flow. As per the announcement, the central bank had increased the bank rate by 1. 5 percentage points and fixed it at 8.5 percent. Likewise, the policy interest rate has been increased from 5.5 percent to 7 percent and the deposit collection rate has been increased from 4 percent to 5.5 percent. These rates have been implemented before the amendment of the unified directive.
Banks had reached a gentlemen’s agreement to stabilize the interest rates since the last five months. However, they are now preparing to increase the interest rate as per the instruction of the central bank.
Nepal Bankers’ Association President Anil Kumar Upadhyay said that the banks will decide about increasing the interest rates after their meeting.
“The Unified Directive has allowed us to increase the interest rates with immediate effect. Now the association will take an official decision after holding a meeting,” he said.
Last year, the banks were involved in unhealthy competition to increase deposit collection by increasing the interest rates due to the liquidity crisis. However, the central bank intervened nine months ago to stop the banks from indulging in such activity. The central bank issued a verbal instruction to the banks not to increase the interest rates on October 19 last year. The very next day, NRB issued a circular allowing banks to increase or decrease the interest rates by ten percent every month.
The association had brokered a deal among its member banks to fix the maximum interest rate on personal deposits at 11.3 percent and the maximum interest on institutional deposits at 10.3. However, the instruction issued by the central bank on Wednesday has paved the way for banks to increase the interest rates beyond the those limits.