Kathmandu, August 17

Development banks and finance companies — class ‘B’ and class ‘C’ financial institutions (FIs) — have urged Nepal Rastra Bank (NRB) to provide a separate window to invest in government securities as commercial banks have lowered the deposit rates to almost ‘zero’ as NRB has prevented commercial banks to count interbank deposit on credit to core capital cum deposit (CCD) ratio.

Following the central bank’s Unified Directives issued on Wednesday, commercial banks have lowered the rate on deposits of development banks and finance companies as such deposits would not help them maintain the CCD ratio. Development banks and finance companies were offered lucrative interest rates of around five per cent on an average by commercial banks on their deposits, as some of the commercial banks are under pressure to maintain permissible CCD of 80 per cent.

Some of the commercial banks have crossed permissible CCD ratio of 80 per cent due to rapid loan expansion against slow deposit mobilisation in the last fiscal and they had offered relatively high interest rates on interbank deposits.

As commercial banks have lowered interest rate on deposits of development banks and finance companies, the class ‘B’ and class ‘C’ financial institutions have said that they should be provided a separate window to invest in government securities citing that the central bank’s recent rule has sapped their investment opportunities.

As the class ‘B’ and ‘C’ institutions are not able to compete on rates with commercial banks while bidding for government securities due to their high operating cost, they used to utilise the interest rate on interbank deposits offered by commercial banks. Earlier, NRB allowed the commercial banks to take into account interbank deposits from class ‘B’ and ‘C’ financial institutions in their CCD.

Financial institutions are allowed to lend up to 80 per cent of the sum of core capital and deposit, and of the remaining 20 per cent financial institutions need to maintain liquid cash (five per cent) and the remaining 15 per cent needs to be invested in government securities. However, finance companies and development banks used to deposit their funds after maintaining certain per cent liquid cash in commercial banks as they are not able to compete on rates while bidding for government securities.

“We need a separate window to invest in government securities as we will not be able to compete in rates with the commercial banks as our operating cost is high,” said Saroj Kaji Tuladhar, president of the Nepal Financial Institutions Association. “Commercial banks earn by investing in government securities from the remaining 20 per cent of the sum of core capital and deposit that is not allowed to be disbursed as credit, hence the central bank must provide a separate

window for class ‘B’ and ‘C’ financial institutions as the recent rule has deprived the latter from taking advantage of interest rate on interbank deposit.”