Banks increasing spread rate instead of decreasing

February 19, 2014
Commercial Banks has increased their spread rate again to 6.85 percent in the sixth month of the current fiscal year; it was 6.73 percent last month. Central bank of Nepal, The Nepal Rastra Bank (NRB) has directed the banks to make preparations to limit the spread rate to 5 percent from the next fiscal year. Such difference between the interest rates paid by banks on deposits and charged on loans was 6.97 percent at the start of the current fiscal year. Commercial banks have surplus liquidity of over Rs 70 billion as loan mobilization did not increase in proportion to the collected deposits from the beginning of the current fiscal year.  The banks reduced the interest rate on deposits owing problems in expanding loan mobilization but they do not review the interest rate for loans. The spread rate of the commercial bank is 6.85 percent as the average interest rate on deposit is now 4.68 percent, whereas the interest rate charged on loan is 11.53 percent.
Hence, the spread rate = Interest charged – Interest paid
=11.53 % - 4.68 %
= 6.85 %
NRB Spokesman Bhaskar Mani Gyawali stated that, ‘’ the banks should have started to decrease the spread rate as they have to limit it to 5 percent from the next fiscal year. But they have not showed responsibility’’. He added that it will be better for the commercial banks to prepare accordingly as NRB will supervise spread rate from the next fiscal year.
Upendra Poudel, Vice President of the Nepal Bankers’ Association (NBA) claimed that the interest rate is being decreased on every successive loan. Poudel added that many bankers disagree the spread rate determined by NRB is impractical. NBA has also urged the central bank to review it. But NRB officials insist that NRB has encouraged the banks to not spend carelessly and to cut operation cost by setting the limit for spread rate. The bankers argue that the service provided by banks, especially those with high cost of fund, will be affected due to the decreasing of interest income.
The NRB recently has been holding discussions with bankers to issue directive to the banks to reduce fees and the central bank is also preparing to issue the directive to stop the commercial banks from raising fees and commission after the limit on spread rate.
According to Shobhan Dev Panta, Chief Executive Officer (CEO) of Lumbini Bank said that, ‘’ the reduce in fees and commission will affect the banks that have a huge network of branch offices and those providing modern banking facilities’’.  Panta further added that, ‘’NRB is seeking more transparency from bankers’’.
Bankers advise NRB to formulate policies considering the total income and expenditure of banks instead of putting limit on interest rates. They added that the banks should be encouraged to provide quality service and expanding network instead of limiting interest income. The limit on spread rate will affect the government banks which have high operating cost and are competing with the private banks providing modern services, the most. The operating cost of Nepal Bank Limited, Rastriya Banijya Bank, Agricultural Development Bank, and old private sector banks and those with a big network is higher.