Kathmandu, March 11

Following the decision of the executive meeting of Nepal Bankers’ Association (NBA) to halt interbank transaction with NIC Asia Bank on Friday, a meeting of all the member banks of NBA, excluding NIC Asia Bank, endorsed the decision of the NBA executive committee today.

The meeting of the NBA, which is a network of the chief executive officers of commercial banks, not only endorsed the decision of the executive committee but also discussed on suspending the membership of NIC Asia Bank if it does not bring down interest rate on deposits to previously agreed level.

NIC Asia Bank’s CEO Laxman Risal had resigned last week after the bank’s board of directors did not agree to stick to the so called ‘gentleman’s agreement’ among NBA members.

Nepal Rastra Bank (NRB) apparently is mum regarding the current development. “We have urged the banks to keep the interest rate on deposits and loans at an ideal level so that depositors can earn from their savings and borrowers also feel comfortable to borrow from banks,” Deputy Governor of NRB Chinta Mani Siwakoti told The Himalayan Times. “Interest rates should not be a cause for any bank becoming unviable.”

“The central bank does not instruct banks to keep interest rates at any particular level, but the banks have to be cautious of not inviting any risks due to their interest rate policy,” informed Siwakoti. “The current situation is because of lack of capacity of the bankers to foresee the immediate challenges and manage a stable environment in the financial system.”

There has been allegation on NIC Asia from NBA that the soaring interest rate could bring about a ‘systemic risk’ in the bank, which could subsequently affect other banks. Ashoke Shumsher Rana, former president of NBA and CEO of Himalayan Bank, has said that NIC Asia’s board has ignored the decision of the Asset-Liability Committee (ALCO) of its management.

“The ALCO’s recommendation should be taken as the guidance in fixing the interest rates and the desire to keep raising rates aggressively without understanding the actual situation could invite an accident,” Rana stated.

Meanwhile, Deputy Governor Siwakoti said that NIC Asia Bank is not under liquidity crunch pressure as it has not applied for the Standing Liquidity Facility (SLF) of the central bank. “If the situation worsens and NIC Asia comes to the central bank to avail SLF and other remedies then we will have to look into the reasons behind that situation,” he said.

NIC Asia Bank has clarified that the bank’s board has not ignored the ALCO’s recommendation. “A majority of deposits in our bank will mature in the third quarter-end and we have to abide by the central bank’s rules on credit to core capital cum deposit ratio. This is why we have offered high interest rate to retain the deposits,” said Sudhir Nath Pandey, spokesperson for NIC Asia Bank. “The situation of scarcity of fresh deposits is expected to be addressed to some extent after the government’s expenditure rises in the last quarter.”

As per the central bank, the government’s treasury surplus stands at Rs 285 billion.

Pandey further added that NIC Asia will approach NBA to talk on its current decision.

NBA’s decision has been widely criticised in the public sphere as being against the principle of a free market economy and some have termed it as a ‘cartel on interest rates’.