Banks and financial institutions may have to change the interest rate on loans on a monthly basis, as they do on deposits, so that the central bank’s effort to raise it can be implemented as quickly as possible. as soon as possible.
Through the Monetary policy 2022-23 Unveiled on Friday, the Nepal Rastra Bank (NRB) raised bank rates, policy rates and deposit collection rates by 1.5% each to 8.5%, 7% and 5.5%, respectively.
The discount rate refers to the interest rate that the central bank of a country charges national banks when they borrow money.
The policy rate refers to the interest rate that the central bank will pay or charge banks for their deposits or loans, respectively. The deposit collection rate means the rate that the central bank offers banks when they place their money in the central bank.
Charging higher rates to provide liquidity to banks will make the cost of funds for banks expensive and this will result in an increase in the lending rate.
Similarly, offering higher rates to park their cash and other liquid assets at the central bank means that banks will prefer to park them at the central bank instead of increasing lending so that the flow of credit is reduced.
“We want interest rates for loans to be raised as soon as possible in line with monetary policy so that the demand for credit decreases,” said Prakash Kumar Shrestha, head of the economic research division at the central bank. “The monthly review of interest rates on loans means that the increased cost of funds for banks and financial institutions will be passed on to borrowers as soon as possible.”
According to him, the plan could be included when reviewing the existing policy provisions on determining the interest rates of banks and financial institutions in accordance with the new monetary policy.
“But it’s not the decision already made,” he added.
Considering that the increase in the money supply and the expansion of credit have contributed to the growth of the demand for tradable goods, which has led to an increase in imports and inflation, the central bank, through the monetary policy, aims to reduce both credit expansion and money supply.
In line with monetary policy, the expansion of credit to the private sector will be limited to 12.6%, a sharp reduction from the 19% targeted last year.
The new monetary policy also aims to limit the growth of the money supply (cash, demand deposits, non-monetary assets that are highly liquid and easily convertible into cash) to 12% compared to the 18% objective for the last financial year.
While reviewing the system for determining interest rates, the central bank also aims to raise the interest rate on deposits so that banks and financial institutions can attract more savings.
According to Shrestha, the NRB could remove the provision that banks and financial institutions could change the interest rate on deposits by a maximum 10 percent of the previous month.
In October last year, the central bank introduced such a provision so that rising interest rates on deposits would not pass through to lending rates. As the country’s economy recovers from the impact of the Covid-19 pandemic, the central bank has adopted the policy of making credit available to borrowers at cheaper rates to help the economy recover .
But the same policy gave rise to excessive lending, leading to massive imports, a wider balance of payments deficit, the depletion of foreign exchange reserves and rising inflation.
“The removal of this provision is expected to increase the interest rate on deposits and the cost borne by banks and financial institutions will be transferred into the lending rate,” Shrestha said.
In addition, there could be a change in the current provision that the spread between maximum and minimum interest rates on deposits should not exceed five percent, according to Gunakar Bhatta, spokesman for the central bank.
The provision was made in December 2020 to encourage deposits in savings accounts, instead of fixed accounts, through the quarterly review of monetary policy 2020-21.
“Nothing has been decided yet but these aspects will be reviewed in the coming days,” Bhatta said.