Committee formed to study financial sector instability

Kathmandu, December 6

The Ministry of Finance (MoF) today formed a committee led by Deputy Governor of Nepal Rastra Bank Shiva Raj Shrestha to study various aspects that have been challenging the financial stability of the country ranging from volatility in the bank interest rates and the fluctuations in the capital market.

Along with Shrestha, the committee comprises chairman of the Securities Board of Nepal (SEBON), president of Nepal Bankers’ Association (NBA), a joint secretary of the Financial Sector Management and Corporation and Co-ordination Division of the Finance Ministry and representatives from Nepal Investors Forum.

“The committee will study the reasons behind the unstable interest rate in the banking sector being witnessed at present and the volatility in the capital market of the country. The committee has been asked to submit its report within a week,” informed Revenue Secretary Sishir Dhungana.

In a bid to lure more deposits to address the crunch of loanable funds in the banking sector, Nepal Bankers’ Association (NBA) — the umbrella body representing the country’s commercial banks — decided to remove the interest rate cap of 11 per cent on individual fixed deposit schemes on Wednesday. Following the decision of the NBA, various banks immediately moved on to raise the interest rate on fixed deposits to up to 12.5 per cent.

Against the backdrop of a majority of commercial banks yet to reach the 80 per cent core capital cum deposit (CCD) mark, banks have been doing their best to collect funds in their coffers by providing high interests on individual fixed saving schemes.

This interest rate war among banks has further promoted inconsistency in the banking sector worrying stakeholders, including the government.

Similarly, the Nepal Stock Exchange — the country’s sole capital market — is plunging close to 1,100 points owing to inconsistency in the interest rate in the banking sector among other factors which have worried investors lately. Speculation of soaring lending rates in the future has hit the confidence of investors in the capital market.

Furthermore, the country’s private sector has expressed their serious concern over the rising interest rate on loans since the past few years.

“Inconsistency in the interest rate has always remained a major setback to industrial growth. As banks have started raising interest rates on loans again, such activities will not only discourage investment but will also make it difficult for the country to achieve its targeted economic growth of eight per cent,” the Federation of Nepalese Chambers of Commerce and Industry stated in a press statement issued today.

Meanwhile, NRB Deputy Governor Shrestha informed that he is yet to be officially informed about the government’s decision. “The committee will work as per the given mandate,” informed Shrestha.