KATHMANDU, Sept 21: The central bank´s plan to introduce base rate in the banking sector has faced opposition, as new banks have objected to the plan saying such a system would not create a level playing field for them.
Nepal Rastra Bank is planning to introduce base rate to make the practice of credit pricing more transparent and enhance efficiency of banks and financial institutions that would ultimately force them to make credit cheaper to compete with peers.
To give a demo of what the system would be like, the central bank on Wednesday invited bankers to its office and explained the concept. But following the meeting, chiefs of new banks said such a system would make it difficult for them to compete with established banks having ability to mobilize deposits at cheaper rates.
Base rate basically sets the floor for credit rates and denotes the lowest lending rate banks can offer to borrowers. Once such rates are announced, banks and financial institutions cannot extend loans at below this rate, except in exceptional cases like credit extended to the deprived sector. If any bank or financial institution violates this rule, the central bank can take action against them.
As of now, the central bank has decided to initially introduce the system in commercial banks, which have to revise these rates every month. This allows borrowers to tally credit rates every now and then and complain or move base if the rates being charged are too high.
“We know the system creates transparency in the banking sector and is beneficial to borrowers. But the system also has its drawbacks, as new banks with higher cost of fund, will not be able to draw customers because their base rates will be higher than that of established banks,” a CEO of relatively newer bank told Republica on condition of anonymity.
The banker´s concern stems from the fact that the formula coined by the central bank has given more weight to cost of fund, or average deposit rate, in calculation of base rate, which, like the banker said, can prove detrimental to newer players.
As of last fiscal year ended July 15, Standard Chartered had the lowest cost of fund of 3.44 percent in the banking industry, while newer banks like Civil and Century had cost of fund of 10.52 percent and 10.44 percent, respectively.
Simply put, Standard Chartered was paying an average 3.44 percent interest on deposits, while Civil and Century were paying average interest rates of 10.52 percent and 10.44 percent, respectively, to depositors. This means base rate of newer banks like Civil and Century will be higher than that of Standard Chartered. This will be the same for at least nine other banks whose cost of fund hovered at above nine percent.
This, however, does not mean cost of fund is the only factor responsible for nudging up base rate.
Other variables like cash reserve ratio, statutory liquidity ratio, operating cost and return on assets are also taken into account while determining the base rate. “But since the cost of maintaining six-percent cash reserve ratio and 15-percent statutory liquidity ratio is also calculated by factoring in cost of fund (coupled with deposits that can be extended as loans), we don´t see how we´ll be able to get leverage,” the banker said.
“This means new banks that don´t have huge deposit base and big network will continue to be left behind as our clients will start rushing to bigger banks once the regulator makes it mandatory to announce base rates. At the same time, our existing customers will also start creating pressure on us to reduce lending rates making it even more difficult for us to do business.”
Nepal Rastra Bank, the central bank, has, however, said what is real cannot be hidden. “The fact that their cost of fund is higher does not mean they can keep their customers in dark. Every borrower has the right to these information,” a high-ranking official of the Rastra Bank told Republica on condition of anonymity.