New deposit interest directives draw bankers' flak

REPUBLICA
KATHMANDU, Sept 9: Bankers have protested the central bank´s latest directives that seek them to pay interest on average deposit balance and as against the practice of calculating interest rates on the minimum balance.
Arguing that the directives issued last week directly intervened into banks and financial institutions operations, the bankers demanded the central bank to roll it back immediately.
Nepal Rastra Bank (NRB) had introduced the new directives after it realized that banks, by paying interest return on balance on the last date of the interest payment period, were actually paying less to the depositors. The practice, which is adopted by all the banks and financial institutions, except in case of accounts wherein they pay interest on daily balance, never takes into account how much balance the depositors maintained till the 28th or 29th day of the month.
Citing this as an unfair practice, the NRB, issuing the directives last week, instructed the banks and financial institutions to pay interest on the basis of average deposit balance for the duration of savings, irrespective of whatever balance amount exists at the time of interest payment.
However, bankers argued that the central bank had directly involved itself into the day-to-day operations of banks and financial institutions by issuing such instruction. “This goes against the existing norms and law,” said a banker.
Meeting with the Governor and senior officials of the central bank on Sunday, the bankers even argued that it was not central bank´s job to bother about how the banks and financial institutions pay interests to their depositors, especially as they are free to decide on the interest rate themselves.
Governor Bijaya Nath Bhattarai, however, remained firm on the central bank´s stance and said that the NRB would not roll back the directives.
“The intervention was simply unnecessary as the depositors are used to the system and have not opposed it so far,” said the banker. He further said that as the directives have been implemented, there was a possibility of interest rates on deposits declining in the days to come. “We have information that some commercial banks have already lowered interest rates by 50 basis points,” he added.
Contrary to bankers´ argument, senior NRB officials stated that the system practiced so far siphoned away the benefits of savings deposit from the depositors the banks and, hence, was unfair. They even termed the practice as a deceitful act, which cheated the depositors, and vowed that the central bank would not withdraw the directives.
According to a quick study, depositors are actually getting three percent interest rates on deposits even though financial institutions offered them seven percent interest rates due to their policy of providing interest on minimum balance.