KATHMANDU: Nepal Rastra Bank (NRB) has reduced the interest rate spread to 4%.
Through the first quarter review of the Monetary Policy, the central bank has reduced the difference between the interest rates on loans and deposits by 0.4 percentage points. The decision means the interest rate spread for commercial banks has come down to 4% from 4.4%. Similarly, the spread rate for development banks and financial institutions has been reduced to 4.6% from 5%.
Once the revised monetary policy comes into execution, the premium charged by banks and financial institutions will come down, said NRB Spokesperson Gunakar Bhatta.
“It will bring interest rate stability and bring down interest rates,” he added. “The central bank has tried to provide some relief to consumers by reducing profits of banks.”
14 banks will have to reduce rates
As per the financial details made public by 26 commercial banks in mid-September, the average spread rate stands at 4.02%. As per the new provision, 14 commercial banks will have to bring down their spread rates. Of the 26 commercial banks in the country, NIC Asia Bank has the highest spread rate of 4.39%. This means, NIC Asia will have to lower its spread rate by 0.39% percentage points.
Likewise, Civil Bank Ltd, Prime Commercial Bank Ltd, Rastriya Banijya Bank Ltd and Bank of Kathmandu Ltd will have to bring down their spread rates by 0.32%, 0.31%, 0.26% and 0.24%, respectively.
Similarly, Machhapuchhchhre Bank Ltd, Everest Bank Ltd, Sunrise Bank Ltd, Kumari Bank Ltd, Laxmi Bank Ltd, mega Bank Ltd, Mega Bank Ltd and Nepal SBI Bank Ltd will have to lower their spread rates by 0.19%, 0.17%, 0.13%, 0.13%, 0.09%, 0.05%, 0.03%.
Banks with spread rate above 4%
| Commercial Banks | Spread Rate (In %) |
| NIC Asia | 4.39% |
| Civil Bank | 4.32% |
| Prime Commercial Bank | 4.31 |
| Rastriya Banijya Bank | 4.26 |
| Bank of Kathmandu | 4.24 |
| Machhapuchhre Bank | 4.19% |
| Everest Bank | 4.17% |
| Sunrise Bank | 4.13% |
| Kumari Bank | 4.13% |
| Laxmi Bank | 4.09% |
| Mega Bank | 4.05% |
| Nepal SBI Bank | 4.03% |
In the previous fiscal year, commercial banks posted a combined profit of Rs 74 billion. Some banks posted profits of as high as Rs 7 billion. Though banks have been making profits in billions, return on investment is on the wane in recent years. Returns in commercial banks stand at an average of 12%. Such retuns in the industrial sector and other businesses are above 15%. The reduction in spread rate will shrink their returns further.
Banker Parshuram Chhetri terms the new policy on spread rate impractical as it will affect the returns of banks. “Banks will lose around Rs 10 billion in the current fiscal year because of this revised policy,” he said, adding: “This will also result in revenue loss for the government.”
Small businesses dissatisfied
Businesspeople across the country took to the streets right after the Dashain-Tihar festive season after loan rates reached as high as 18%. They went to the extent of seeking the resignation of Governor Maha Prasad Adhikari. They, however, had to withdraw the protest at the request of the Federation of Nepalese Chambers of Commerce and Industry(FNCCI) as the election dates were nearing.
Though the policy revision will help to pacify some businesspeople, small businesses are not satisfied with the decision. They say the revision will only serve the interests of big businesses. Therefore, businesspeople of the eastern region are preparing to resume their protest.
Former President of Morang Merchants Association, Pawan Sharada, said the decision to bring down spread rate to 4% won’t provide relief to small businesses. “The central bank’s policy should be supportive to all. It may help big houses, taking loans in billions. Others won’t get any significant benefit,” he added.
Meanwhile, the reduction in profitability of banks will affect small shareholders of banks. On the other hand, banks are allowed to levy a premium on 2% base rate on MSMEs and directed sectors. Further, banks pursuing mergers and acquisitions are allowed to increase the spread rate by one percentage point.
FNCCI President Shekhar Golchha said the reduction in the spread rate will bring down interest rates. “Everyone will be benefited when the rates come down,” he added.
The central bank has also said that the policy of reducing the spread rate was taken as per the Finacial Sector Development Strategy and that it would be in the interest of all. “Our policy is to maintain interest rate stability. It is wrong to say that it would benefit big lenders only,” Bhatta added.
