Banks to limit savings interest at 4-6pc

Bankers under strong pressure to jack up savings interest rates have agreed to limit interest returns on savings deposits at 6 percent -- a move which goes against the spirit of open market policy. They have also concurred to set the minimum rate of returns on savings deposit at 4 percent, which is lower than what the depositors were expecting, following the central bank´s latest directive that asked banks and financial institutions (BFIs) to limit the gap between different savings rates to 2 percent or less. "A gentleman´s agreement has been reached to limit the savings rate between 4 and 6 percent," said a member of Nepal Bankers´ Association (NBA).

New commercial banks, however, have been given permission to fix higher rate by a margin of as much as 1.5 percentage point, he said, adding that the NBA will soon hold a meeting of chief executives of all 30 banks this week to formalize its implementation. NBA in May had also enforced a similar decision, whereby banks are still limiting interest rates on fixed deposits at 12 percent. Once the new decision comes into effect, depositors who were already enjoying as much as 10.5 percent annual interest returns on savings will find their return drop to 6 percent.

This will also reduce the prospect of salary account holders and other accounts holders enjoying far better returns than now. So far, the banks were providing just 2 percent annual interest returns to such accounts holders. The bankers said their agreement to limit the savings rate had become necessary mainly to avoid unhealthy competition among banks to attract additional deposits. If unstopped, they said it will ultimately drag entire banking industry toward disaster. "Competing on savings rates makes no sense, especially if it is already driving away the borrowers. Besides, our economy is also not productive and competitive enough to cope with higher lending rates," said the NBA official.

As for the rising lending rates, bankers said they will study the possibility of its downward revising only after studying the impact of the new decision. When asked to comment, NBA President Sashin Joshi said, "We had discussions on how to implement the central bank´s new directives on savings rate". He refused to make further comments on the agreement. Some of the bankers, however, noted that the new move could be risky particularly given the latest trend of customers becoming more interest sensitive and their competitors like development banks and financial institutions offering as much as 13.5 percent.

The decision to cap the fixed deposit rate at 12 percent has already caused the banks lose deposits of some Rs 4 billion to the financial institutions. Nepal Bank Limited and Ratriya Banijya Bank -- two public sector banks that offer least savings returns -- said their deposits have dropped by Rs 4 billion and Rs 5 billion respectively over the last five-and-a-half months, as BFIs offering higher returns stole their customers.

Source:
myrepublica