KATHMANDU, APR 23 -
Global institutions including the World Bank and the International
Monetary Fund (IMF) have expressed reservations at the recent directives
of Nepal Rastra Bank (NRB) related to the spread rate and directed
lending.
Releasing the Nepal Economic Update on Tuesday, the World Bank said
that the combination of deprived and productive sector targets with the
envisioned introduction of the cap on deposit-lending spread imply
restrictions on banks’ room to manoeuvre through both prices and
quantities.
Channelling large amounts of funding through deprived sector lending
may discourage eligible micro finance institutions (MFIs) from
developing products and targeting clients beyond ones specified by NRB
policies. “This may result in a segment of the market not being served
by MFIs,” it stated.
Aurelien Kruse, senior country economist of the World Bank for Nepal
who made the presentation on the report on Tuesday, said that although
the NRB measures were guided by good intentions, they pose a risk to the
financial system and may not best serve the objective.
“Customers can decide whether to obtain service from certain banks
based on their various charges and they should be made transparent.”
The central bank has told banks and financial institutions (BFIs) to
bring down their spread to 5 percent max within the current fiscal year.
Similarly, it has expanded deprived sector lending requirements to 4.5
percent for commercial banks, 4 percent for development banks and 3.5 percent for finance companies.
NRB officials have countered international reactions to its move by
saying that they did not reflect Nepal’s ground realities. They added
that the steps taken by the central bank were necessary.
The central bank had imposed the spread rate cap in order to enable
depositors to get a better interest on their savings and people who take
loans could get them at a cheaper rate. Central bank officials said
that the measure was necessary as banks had failed to abide by its
repeated calls to maintain a justified spread rate.
The World Bank report further stated that the cap on interest rate
spread could also prove counterproductive as it was likely to induce
banks to reduce their exposure to sectors that carry a higher interest
rate.
The spread rate cap could affect lending to small and medium enterprise
(SMEs) and long-term financing which is currently underserved.
Stating that the capital adequacy ratio could be significantly lower to
cover the ever greening of non-performing loans, the cap on the spread
rate could squeeze profitability at a time when there is a likely need
to rebuild capital through earning.
Nepal Rastra Bank is conducting a diagnostic review of the banking
system later this year which is expected to unearth the extent of the
ever greening of bad debts.
The World Bank suggested that transparency in disclosing the effective
cost of financial service could help the market to function better
without forcing the central bank to take administrative measures.
It said that designing a methodology to calculate, disclose and monitor
the cost of a basic financial product in a standardized and comparable
manner for typical user-groups could help in this regard.
The global lender has said that the central bank’s barring banks from
charging fees in mobile banking could dissuade them from investing in
innovative delivery channels due to inability to recoup their investment
costs, although such channels hold significant promise for expanding
outreach in geographically remote areas of the country.
Similarly, the assessment of the IMF team under the article IV mission
which it undertakes annually showed discontent at the central bank’s
steps. Mission team leader Alexander Pitt said that the spread rate cap
could force banks to provide loans at a rate lower than the one they
wanted to maintain for long-term projects.
“Given the higher risk in long-term projects, banks may not lend them
money for lower returns in interest earning,” he said. “The compulsory
deprived sector lending provision has increased competition among banks
and increased the cost to banks.”
However, NRB officials said that given the country’s development needs,
it could not copy Western banking systems by fully leaving it to the
market to determine everything.
NRB Spokesperson Bhaskarmani Gnawali said that directed lending was
necessary as banks continued to lend in risky areas like real estate and
a few corporate clients instead of to the masses.
“Directed lending has increased loans to the productive sector which is
much safer than the ones where they previously extended credit,” he
added.
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