With tacit support from the Nepal RastraBank (NRB), the Nepal Bankers’ Association (NBA) has once again decided to capinterest rates on deposits.

A meeting of the NBA held on Thursday inthe presence of the CEOs of all 28 commercial banks decided to revive its‘gentlemen’s agreement’ on capping interest rates on deposits. NBA had a fewweeks ago removed the cap.

Now, commercial banks will not providemore than 7 percent interest on savings account while the maximum interestrates on fixed deposit will be 11 percent for ordinary depositors and 10.5percent for institutional depositors. Currently, some banks have been acceptingfixed deposits at up to 13 percent interest while institutional depositors aregetting 14 percent interest on their deposits.

Bankers point out ‘unfair competition’among commercial banks in the absence of a cap as the reason for their decisionto reintroduce the cap.

However, NBA President GyanendraDhunganawould not acknowledge that the umbrella organization of commercial banks againfixed a cap on the interest rates apparently to avoid the backlash over thedecision that was criticized as ‘interest rates cartel’.

“We haven’t fixed any cap as NBA wasearlier criticized as cartel for the decision to cap interest rates. Instead,we have agreed on a interest rate framework that allows banks to providesavings interest close to the inflation rate and some percentage points higheron fixed deposits,” said Dhungana. 

“The NBA move supported by all memberbanks aims to curb unhealthy competition among banks to attract funds. Suchcompetition would only add to the already heavy financial burden on borrowers,”added Dhungana. 

While Dhungana refused to acknowledgethat a new interest cap was introduced, another executive member of the NBA toldRepublica that the meeting indeed capped the interest rates on savings andfixed deposits.

“The meeting has also decided to stoppayment of interest on daily or monthly basis,” said the executive member.“Those who violate the agreement will face action,” he added without explainingthe action.

When asked why they first decided toremove the cap and then reintroduce it, he said, “Earlier, the media accused usof operating as cartel. So we briefly removed the cap on interest just to showhow unruly can the market be in the absence of cap.”

Earlier on June 10, the NBA had ditchedthe cap on interest on deposits it had introduced in March, citing acuteshortage of lendable funds in the banking system. 

Even the Nepal Rastra Bank (NRB) hasbeen turning a blind eye to the move of the NBA that goes against the freemarket practice. “We should not take amiss the initiative of the forum of banksto maintain stability of interest rates,” Narayan Prasad Paudel, the NRBspokesperson, told Republica. 

NBA’s previous decision to cap intereston deposits was criticized by the World Bank as an ‘anti-competitive’ behavior.“Feeling squeezed by the credit to core-capital-cum-deposit (CCD) ratio limit,some banks’ attempts to attract new deposits by offering higher rates in excessof 10 percent have been curtailed by the Nepal Bankers’ Association,” read theNepal Development Update of the World Bank released on April 17. 

Source: MyRepublica, 24^thJune 2018