March 10: At a time when the movement against interest rates is intensifying, it has been revealed that the interest rates charged by banks and financial institutions (BFIs) have become highest in 10 years. Due to the tight monetary policy taken by Nepal Rastra Bank (NRB), the average interest on loan of commercial banks is close to 13 percent.

NRB adopted strict policy after inflation increased due to the Covid-19 pandemic and Russia-Ukraine tension along with decline in foreign exchange reserves.

As soon as the pandemic subsided, the interest rates of the banks started to rise from last year after the banks became aggressive in extending loans. In December 2022, the average interest on loans of commercial banks was 9.44 percent, which reached double digits since January. With the tightening of monetary policy by NRB in the current fiscal year (FY), the cost of banks' capital increased, increasing the interest on loans.

In order to discourage credit consumption, NRB announced that the bank rate has been increased by 1.5 percentage points to 8.5 percent, the policy rate from 5.5 percent to 7 percent, and the deposit collection rate from 4 percent to 5.5 percent through monetary policy of the current year.

After the high interest rate was heavily criticized, NRB announced to reduce the spread rate of the banks through the first quarter review of the monetary policy of the current year. As per the instructions of NRB, commercial banks have been told to reduce the spread rate to 4.2 percent from April 2023. From June 2023, commercial banks should maintain a spread rate of 4 percent.

NRB also reduced the overnight repo interest rate by 1.5 percentage points to 7.5 percent. NRB expects that the cost of capital of banks will decrease along with the interest rate.

The businessmen are conducting pressure programs to reduce the interest rate saying that the banks charge high interest rates to earn more profit and due to this they are unable to pay the loan. On the other hand, the bankers are claiming that interest rates are automatically rising because the banks’ costs are increasing as they do not have enough investable capital.

Former Governor of NRB Dipendra Bahadur Chhetri interprets the interest rate controversy as a product of the government's policy and the practice of banks. He said that even if the market determines the interest rate, there is a dispute because of the intervention of NRB and the carteling of banks.

After the lack of liquidity in the banking system, there was an unhealthy competition among banks to attract deposits by raising interest rates. NRB intervened after commercial banks increased the interest rate on personal savings to 12 percent. According to the instructions issued by NRB, the banks can reduce the interest rate only by 10 percent compared to the previous month. However, the umbrella organizations of BFIs have been determining interest rates through the association by mutual agreement.

Narayan Prasad Pokharel, Assistant Spokesperson of NRB says that it is necessary to regulate the interest rate market. He said, “If NRB had not intervened, the commercial bank's interest rate would have reached 18 percent by now.”

President of Nepal Bankers Association, Sunil KC, claims that a gentleman’s agreement has been reached to keep the interest rate at one level and create an environment of healthy competition.