March 14: Banks and financial institutions (BFIs) have decided not to increase interest on deposits in the month of Chaitra (mid-March to mid-April) after concluding that it is not the solution to the current liquidity crisis.

Nepal Rastra Bank (NRB) has made it mandatory for BFIs to issue a public notice regarding the hike of interest rate a day before the beginning of a new month. As the banks have decided not to increase the interest rate, the existing rates will be applicable for the new month as per the Nepali calendar.

Separate meetings of Nepal Bankers’ Association, the umbrella body of the CEOs of commercial banks of Nepal, Development Bankers’ Association and Nepal Finance Companies’ Association decided not to increase the interest rates.

“We agreed not to increase interest rates as it is not the solution to the liquidity crisis. Increasing the interest rate doesn’t necessarily increase deposits and resolve the liquidity crisis,” said Pradhuman Pokharel, chairman of the Development Bankers’ Association.

As per the existing rules set by the NRB, BFIs had increased the interest rate for the month of Falgun (mid-February to mid-March) by 10 percent. During the review month, banks had fixed the maximum interest rate on personal fixed deposits at 11.03 percent. Similarly, development banks had fixed the maximum interest rate at 12.65 percent while the finance companies had set the interest rate at a maximum of 11.71 percent. The same rates will be applicable in the month of Chaitra (mid-March to mid-April).

BFIs were involved in an unhealthy competition of increasing interest rates due to the lack of investible capital in the banking system in the current fiscal year. The interest rates of commercial banks had almost reached 12 percent some four months ago. The central bank then intervened and ordered the banks to lower the interest rates to a single digit.

Issuing a circular in the month of Kartik (mid-October to mid-November), the central bank had allowed banks to increase or decrease the interest rates by a maximum of 10 percent every month. BFIs didn’t increase the interest rates for the next two months after the NRB issued such circular but they decided to increase the interest rate by 10 percent in the month of Falgun (mid-February to mid-March).

Although the BFIs had increased the interest rates with permission from Nepal Rastra Bank’s Governor Maha Prasad Adhikari, Finance Minister Janardan Sharma was unhappy about such decision. Similarly, businessmen and entrepreneurs of the country had also issued separate statements denouncing the hike in interest rates. Despite increasing the interest rate, BFIs have not witnessed any significant improvement in deposit  collection.