Kathmandu, August 2

The government, for the first time, has imposed a cap on the interest on loans floated by cooperatives to curb excessive interest rates charged by them, especially by savings and credit cooperatives.

Under the new regulation, which comes into effect on Sunday, the Department of Cooperatives has restricted cooperatives from levying more than 16 per cent interest on loans they disburse to their members.

DoC has also fixed the interest spread rate, which is the difference between interest rate that cooperatives charge on loans and the interest rate they give on deposits, to a maximum of six per cent. This means that if a cooperative is charging 16 per cent interest on loans, it should give 10 per cent interest on deposits.

Due to lack of effective regulation and monitoring, cooperatives had been charging up to 25 per cent interest on loans. As issuance of loans from savings and credit cooperatives is comparatively easier, borrowers often prefer cooperative loans over bank loans despite the high interest rates. However, capping the interest rate on cooperative loans will affect a few banks whose interest rate on loans was 16 per cent at some point.

As the cooperative sector and the interest rate on cooperatives have largely remained unregulated, the interest rate cap will not only ensure healthy growth of the sector but will also provide relief to borrowers from cooperatives, stated Tok Raj Pandey, registrar at the department. “Any cooperative not complying with the new regulation will face legal action,” he said.

The lack of proper regulation to control interest rate in the cooperative sector had not only troubled borrowers from cooperatives and depositors, but also cooperatives themselves. As savings and credit cooperatives started announcing unrealistic interest rates on deposits to collect funds, they became ‘problematic’ in recent years.

Cooperatives, especially in countries like Nepal, are the major financial institutions that provide momentum to economic activities at the local level.

There are a total of 34,512 cooperatives across the country with almost 6.4 million members. The new interest rate cap is primarily targeted at 13,578 savings and credit cooperatives in the country with almost 3.5 million members.

Earlier, DoC had formed an interest rate fixation committee under the leadership of Registrar Pandey, comprising representatives from Nepal Rastra Bank, Ministry of Finance, Federation of Savings and Credit Cooperative Unions and National Cooperative Federation of Nepal.

The interest rate cap and spread have been determined based on the report prepared by the committee.

The cooperative sector has welcomed the decision of the government regarding the new regulation.

“The cap on interest rate and spread has been determined based on the recommendation of cooperatives. This was necessary in view of the widespread network of cooperatives in Nepal, its direct link to the economy and most importantly for the well-being of 6.4 million members that cooperatives in the country have,” said Keshav Badal, chairman of the National Cooperative Federation of Nepal.