Sky-high interest rates

December 31, 2017 02:00 AM Republica


Bank interests are rising at an alarming rate these days. As bank and financial institutions (BFIs) are now competing to attract fixed deposit at over 13 percent, the borrowing cost has also become expensive. There are complaints from business community that BFIs have already raised their lending rate by two to three percentage points up to 17 percent. The spiral-like rise of interest rates is a result of mismatch between the growths of deposit and loans of BFIs in past few months despite Nepal Rastra Bank (NRB)’s repeated advice for maintaining a cautious approach in doing business. While the deposit of BFIs is increasing at a very slow pace, banks have been aggressive on lending. The result is that BFIs are now left with a very little fund to extend as credit because NRB rule does not allow BFIs to lend more than 80 percent of what they have as core capital cum total deposit. No wonder,   they are trying to raise the stock of deposit by wooing people and institutions with higher interest rates so that they can have more funds at their disposal to do business. While this may be a a boon for general savers who were provided very low interest rates until 2016, it is going to be a big problem for country’s economy in general and industrialists, business firms and other borrowers in particular. 

There are worries that rise of interest rates will erode loan repayment capacity of those who had already borrowed. It might increase cost of production, reduce competitive advantage of domestic products, make imported goods expensive and risk dampening the economic growth momentum. One of the major reasons behind the shortage of lendable fund in the banking industry is slow capital expenditure. While BFIs are struggling to manage fund to lend, nearly Rs 325 billion is lying idle at the central bank as treasury surplus due to the inability of the government to spend. The situation is likely to worsen when an estimated amount of Rs 60 billion will be withdrawn by mid-January for tax filing purpose. This fund will add up to the cash surplus that the government maintains at its account in the NRB. If the government increases its capital spending, this would pump more cash into the banking industry, helping eventually in correcting the rise of interest rates. 

This is why it is necessary for both the government as well as NRB to increase the refinance fund to make sure that the business community, particularly manufacturing and productive sectors, will get the concessional financing facility when the borrowing cost is going to be exorbitantly high. While the NRB has decided to increase the refinance fund to Rs 20 billion, the fund is oversubscribed and insufficient. NRB should also be extra-vigilant on bank’s practices of haphazardly increasing loan rates under the pretext of rise on their cost of funds as well as unhealthy competition of deposit collection. In fact, BFIs themselves should maintain prudence while doing banking businesses. It’s unfortunate that banking executives cannot forecast their liquidity position for even six months, and indulge in raising and slashing interest rates quickly.  Increase and decrease in interest rate should be justified by economic logic. 

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