Nepal | July 20, 2019

BFIs can bring down lending rate any time

Himalayan News Service

Kathmandu, September 10

Borrowers can now negotiate with banks and financial institutions (BFIs) to bring down the lending rates.

Amending the earlier provision which instructed banks to keep the lending rates unchanged for at least a quarter, Nepal Rastra Bank (NRB) has allowed BFIs to bring down the lending rate any time. However, the central bank has kept the provision related to lending rate hike unchanged.

“BFIs can bring down the lending rate any time based on negotiations with their clients, however, they will have to wait till the quarter-end to hike the lending rates,” according to Narayan Prasad Paudel, spokesperson for the central bank. “Lending rates can be hiked at the end of the quarter only if the base rate increases, but BFIs can reduce lending rate any time.”

The central bank has allowed the BFIs to add two percentage points premium on the base rate. The base rate is calculated on the basis of expenses incurred by the banks and financial institutions to collect deposits, plus 80 per cent of the bank’s overhead expenses (on staff and rent), plus up to 0.75 per cent profit. If a bank’s returns on government securities is lower than deposit collection rate, they can add the shortfall in the base rate.

According to Paudel, the central bank has allowed BFIs to add two percentage points premium but they can lend at the base rate as well.

On the other hand, the recent amendment of the Unified Directives has allowed the BFIs to lend below the base rate to the deprived sector, mainly through microfinance institutions (MFIs). BFIs have to lend five per cent of their total loan portfolio to the deprived sector. “Instead of paying penalty to NRB for not fulfilling the deprived sector lending, BFIs can lend to the deprived sector even below the base rate,” as per Paudel.

Likewise, NRB has allowed banks to add one percentage point to the published rate while obtaining deposits through bidding from institutional depositors like Employees Provident Fund (EPF) and Citizen Investment Trust (CIT). However, such deposit rate should remain unchanged for one quarter.

The government-owned non-banking financial institutes – EPF and CIT – mainly engage in bargaining with the BFIs while making deposits, which has been blamed for the skyrocketing deposit rates. In a bid to control this spurt in deposit rates, the central bank has introduced the provision to keep the interest rates of the deposits collected through bidding unchanged for at least a quarter, as per Paudel.

A version of this article appears in print on September 11, 2018 of The Himalayan Times.

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