The Nepal Weekly 
April 29, 2023By R.N. Pradhan
Banks intermediate on mobilization of financial resources. They collect the scattered savings and make it available to the needy person who contributes the economy directly or indirectly creating value. Bank mark ups certain margin for carrying its business. The difference between its lending rate and deposit rate contributes on its profit. Nepalese banks are free to determine interest rate. They can fix their own deposit rate and lending rate remaining within regulatory framework. The regulator has issued so many regulatory guidelines on fixing interest rate such as base rate, interest spread, premium over perceived risk etc for controlling interest rate indirectly. Depositors are attracted with the higher rate paid by the bank. On the reverse side borrowers are attracted with lowest rate. But, banks used to fix the rate as drive by the market.
Though depositors are large in its size, they are not being able to place their voice. They are not organized. So, they are helpless. Borrowers are playing vital role on interest rate determination. They are organized so they can place their voices before the authorities. On this issue, some of the curiosities are:
1. One of the basic objectives of Banks and Financial Institution Act 2073 is to provide quality and reliable banking and financial services to general public through healthy competition among banks and financial institutions. Preamble of the act is quoted hereunder:
“Preamble: Whereas, it is expedient to amend and consolidate forthwith the prevailing laws relating to banks and financial institutions in order to increase confidence of general public towards the overall banking and financial system of the country; to protect and promote the rights and interests of depositors; to provide quality and reliable banking and financial services to general public through healthy competition among banks and financial institutions thereby making national economy sustainable and strong; and to maintain financial stability and make necessary legal provisions concerning establishment, operation, management, regulation, inspection and supervision of banks and financial institutions;
However, Nepalese banks used to have pressure from the buyer on their product and they use to change price of their product or assure them to accommodate their demand. The act also restricted Nepalese banks to carry monopoly market or do controlling exercise on financial transactions carteling among them. Section 50(1)(h) of the act is quoted hereunder:
“(h) To create any type of monopoly or other type of restrictive practices in banking and financial transactions in collusion of banks or financial institutions,”
However , Nepalese banks are quoting uniform deposit rate through its Association. If this system is favorable to the economy why not to start the system of fixing interest rate by the regulator itself as earlier.
2. Borrowers are raising their voice from street to reduce the interest rate to single digit. All the others are also supporting including investors. The question is that in case the depositors also put forward their demand to increase the interest rate what will be the situation. The situation will be very alarming in case they stand in their demand for only one day saying that they will not deposit the money until they are paid desired rate. If the borrowers can pressurize the banks for reducing the interest rate the depositors have also right to fight for reasonable price of their product. It is also their fundamental right whether to deposit their savings with the bank or not. The situation leads to develop non monetized sector, speculative market and investment on non productive sector, creating obstacles for the economic development.
3. Bank use to supply the loan and borrowers are the consumers. If consumers can pressurize the bank for fixing the price in favour of them what will be the situation when other consumers also start to pressurize other suppliers for fixing the price in favour of them. Savings are the product of depositors. It is not cost free, it needs to fetch at least inflation rate particularly on underdeveloped economy.
4. Definitely, interest rate is one of the factors of cost of goods and services among others. Transportation cost plays vital role on the general price level of a country like ours. There are instances of price hike of fuel even three times in a month which has largely contributed to increase general price level. The nature of price is that once it starts to increase it is very difficult to decrease even in case of decreased price of fuel. Oil market of the country is monopoly and it is being supplying by the government corporation. So, it will be better to change the price of oil only once in a year or so creating price equalization fund.
In the meantime, it is also required to think over other factors of cost. It will not be prudent to change the price level of capital treating it as a instant noodles. Because interest rate may be a factor for controlling price level in short period but it may not be true in long run.
5. Interest rate is charge as per the arms of the clock. One who use the bank loan for six months will pay Rs 6/- only for the borrowed loan of Rs 100 at 12% whereas another person who use the loan for a year needs to pay Rs 12/- as an interest. An efficient borrower may complete the project within six month whereas another inefficient may take two years to complete the project. The impact of the delayed project lies vividly on the stakeholders of the project. The borrower will be hit most than the other stakeholder and that is very natural. The borrower, entrepreneur is the one who moves ahead for making profit. In case he succeeds on his project he is the one and only person to enjoy the booked profit. So, he must have courage to struggle with the adverse situation. There is no record of excess payment to a bank than the fixed rate voluntarily even at the time of highly success of the project. Because a bank is not equity partner, its interest on the business of the borrower is very limited. But, we cannot forget the fact that eventually the neck of the borrower and bank tied together.
6. Presently banks are increasing and decreasing the interest rate at their mercy as per the demand of their product. When they find market of loan they use to increase the deposit rate and vice versa. This is because most of the regulatory guidelines are linked with spread. To maintain the spread banks are increasing and decreasing deposit rate. There should also be some guidelines limiting on the minimum rate of deposit in reference to inflation rate or like which will control the cases of capital flight and uses of capital on unproductive sectors.
