Kathmandu, October 9

Commercial banks have started competing in interest rate to attract fixed deposits, breaching their earlier gentleman’s agreement.

Banks had agreed to limit the interest rate on fixed deposit to 10.5 per cent for institutional depositors and 11 per cent for individuals. However, recently, some commercial banks have accepted institutional deposits at 11 per cent and one commercial bank recently accepted fixed deposit at 11.5 per cent from the Deposit and Credit Guarantee Corporation.

Banks have started facing crunch of loanable funds as credit expansion skyrocketed while deposit mobilisation slowed to a crawl. This is happening in the banking industry amidst the projection that lending rates will come down.

Nepal Rastra Bank — the central regulatory and monetary authority — through the Monetary Policy has presented a raft of measures to keep the interest rate at an ideal level and stabilise it. However, slow growth of deposits against high demand of credit could invite financial turmoil like in the previous fiscal years.

To avoid this situation, NRB had asked banks to submit their credit and deposit plans since the beginning of this fiscal. Bankers claim that while the central bank has sought their plans, it has neither reviewed nor made any intervention based on that analysis.

Meanwhile, the meeting of Nepal Bankers’ Association (NBA) — the umbrella network of class ‘A’ banks — has been scheduled for Thursday morning to discuss the recent development and unhealthy competition in the market.

Bankers have been arguing to bring down the deposit rate by 0.5 percentage point from the earlier agreement eyeing expectations that the lending rate will come down. The NBA meeting will discuss on keeping the fixed deposit rate for institutional depositors at 10 per cent and for individuals at 10.5 per cent, according to sources.