Nepal | August 11, 2020

NRB won’t review new spread rate calculation method for banks

Himalayan News Service
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Kathmandu, August 9

The Nepal Rastra Bank (NRB) seems to be in no mood to review its new spread rate calculation decision.

Though bankers had recently collectively urged the central bank to review the ‘spread rate calculation’ decision, NRB has expressed its unwillingness to consider the request.

“The spread calculation rule has already been enacted, which means that banks and financial institutions should comply with it. The rule will not be reviewed immediately,” said Laxmi Prapanna Niraula, spokesperson for NRB.

As stated in the Monetary Policy for 2019-20, the NRB had issued a circular earlier this week revising the formula to calculate the spread rate that banks are required to maintain. As per the new spread calculation rule, banks cannot include their interest-earning from investments in government securities while calculating the spread rate as allowed earlier. The NRB circular had barred banks from incorporating the earnings from investment in the spread rate calculation.

However, Nepal Bankers’ Association (NBA) — the umbrella organisation representing 28 commercial banks of the country — had expressed its objection over the central bank’s decision to revise the formula to calculate the spread rate citing that implementation of the new method will directly squeeze the banks’ profits by almost Rs 30 billion, or 25 per cent of the total profits in the banking sector.

Moreover, banks had also said that the changed spread calculation method would ultimately hit the economy and its growth.

By changing the spread calculation method, NRB had primarily intended to bring down the interest rate on loan, while the provision also targeted at compelling banks to go for merger.

Though majority of commercial banks have expressed their commitment with NRB to go for merger and the Monetary Policy too encourages merger between banks, the banks are not doing much to implement their commitments, as per NRB.

“Despite their commitments, banks are yet to start merger process. As NRB has announced various subsidies for banks that go for merger, banks should start their merger process rather than questioning different decisions made by the central bank,” added Niraula.

Provided that banks merge and start a unified transaction by mid-July 2020, the NRB has extended the deadline for such banks to float the required loans in the agriculture, energy and tourism sectors till mid-July 2021.

Similarly, the merged bank will also get up to mid-July 2021 to maintain the spread rate at 4.4 per cent.

Furthermore, the cooling period of six months for board of directors of merged banks and their chief executive officer and deputy CEOs will not be applicable, as stated in the Monetary Policy for the ongoing fiscal.

 


A version of this article appears in print on August 10, 2019 of The Himalayan Times.


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