Spread rate of Rastra Bank shrinks as Bank profits decrease

Prayas Shrestha

Kathmandu - The banks and finance companies in which Nepal Rastra Bank (NRB) is said to reduce the goods by 0.4 percent, their spread rate will only be implemented from the next financial year. The integrated directive, 2078 which the central bank had issued to banks and financial institutions of categories A, B, and C have been revised on Wednesday. According to the revised integrated directive by the central bank, the average interest rate difference (spread rate) set by the monetary policy will only be implemented from Asar 2080.

The bank reviewed the monetary policy of the fiscal year 2079-80 and stated that the spread rate of commercial banks will be reduced by 0.4 percent from the previous spread of 4.4 percent to 4 percent, while the average interest rate difference between development banks and finance companies will be maintained to 4.6 percent from 5 percent. But NRB states that this policy will be postponed this year and will be implemented from the next year on.

Rather, NRB states that it will only reduce the spread rate up to 0.2 percent, backing away from its decision to cut the spread by 0.4 percent. The integrated directive, 2078 which NRB has revised, states that the banks and finance companies should maintain an average interest rate gap of 4.2 percent and 4.8 percent respectively from Chaitra 2079 onwards.

Why did Nepal Rastra Bank back away from its own decision?

To reduce the impact of the recently increased interest rate on production, NRB adopted a policy to reduce the spread rate by reviewing the monetary policy. Due to the high-interest rates, the industrial businessmen protested against the bank saying that it was impossible to do business and the movement is still ongoing.

When the pressure of the businessmen started affecting NRB directly-indirectly, the bank decided to address the demand by reducing the spread rate through monetary policy, thus backing away from its own decision.

"Monetary policy will take aim, and implementation will happen only after the circular." Even though the quarterly review was said to reduce the spread rate by 0.4 percent, as it is not appropriate to reduce it immediately based on the needs, the policy of gradually reducing the spread rate has been adopted,' Narayan Prasad Pokharel, the co-spokesperson of NRB, told Ratopati.

After the review of the monetary policy, the circular of NRB said that it will reduce the spread rate by 0.2 percent after the middle of Chaitra 2079, and by 0.4 percent only after the middle of Asar 2080, rather than reduce the spread rate by 0.4 percent directly.

The concern of Bank's profit

It seems that NRB, which has made a policy of reducing the spread rate to control the interest rate of loans, has acted due to the banks' profit concerns. The interest rate of the loan also decreases, upon the decrease of the spread rate. It is seen that the banks are putting pressure on NRB to not reduce the spread rate after the profit shrinks.

Currently, the interest rate of deposits of commercial banks is 12.13 percent. If the spread rate is maintained at 4.4 percent, the interest rate of loans will reach 16.53 percent. But when the spread rate decreases by 0.4 percent, the interest rate of the loan will reach only 16.13 percent and the profit will decrease making the banks suspicious. However, the interest rate of the loan is also affected by the base rate of the banks and the premium charge.

The problem of the interest rate is now, but why did NRB postpone the implementation of the spread rate policy of 4 percent to the next financial year? To the question, the co-spokesperson of NRB, Pokharel said, "It is impossible to cure every disease at once." Even if there is a severe disease, treatment must be done gradually. Thus, NRB adopted a policy of reducing the spread rate by 0.2 percent after Chaitra and by another 0.2 percent after Asar. This decision has been taken by keeping in mind that if the spread rate is reduced by 0.4 percent at once, there will be huge pressure on the banks.

But since the liquidity in the financial market is getting easier in recent times, the interest rate is seen to decrease automatically, so there is no need to grab the reins of the spread rate according to Pokharel.

NRB has stated that the inter-banking interest rate of 8.5 percent has dropped down to 7 percent.