March 18: Unhealthy competition among banks over the issue of interest rates has increased due to the liquidity crisis in banks and financial institutions. 

It has been found that the banks have collected deposits violating the interest rate guidelines set by Nepal Rastra Bank. 

The central bank has taken action against a dozen banks in the second quarter of the current Fiscal Year (FY) 2078/79 (mid-October to mid-January) for fixing interest rates against the directives of NRB. 

NRB officials say that even if the banks are free to set interest rates, they have to do so within the criteria set by the central bank.

The central banks monitors their activities and takes action in case of any violation.

Deputy Spokesperson of the central bank, Narayan Prasad Pokharel, said that the chief executive officers of some banks that violated the directive on setting interest rates, have been warned not to repeat the mistake again in the coming days. 

According to the NRB, banks are not allowed to change the interest rate on fixed deposits for up to three months. NRB said that the action has been taken for violating the provision that the difference between the maximum and minimum interest rates given on deposit accounts should not be more than 5 percentage points. 

Banks were aggressive in extending credit at the beginning of the current fiscal year after the Covid-19 pandemic, lockdown and prohibitory order was eased. Despite the expansion of credit beyond the annual target, the deposit collection did not increase accordingly, leading towards the liquidity crisis. 

Along with the liquidity crisis, there was competition between banks and financial institutions to raise interest rates. NRB had instructed the banks to keep the interest rate within a single digit after the commercial banks increased the interest rate on deposits up to 12 percent in October. 

Similarly, issuing a directive on October 20, the central bank stated that the interest rate can be changed by only 10 percent every month.