|
Market & Interest
Since the interest rate offered by banks on deposits has been lower than the inflation rate, there is a strong case for bringing it up. But the method adopted recently by the central bank to bring about the correction is far from logical. Ordering banks to increase this rate and reducing the rate charged on loans, the central bank has indicated that it is going back to regulated system discarded long ago.
No doubt, the huge difference between the interest rates on the deposits accepted and the loans advanced by banks, called the "spread", must be minimised. It should, however, be borne in mind that the spread is an intermediation margin and if it is high it indicates two possibilities - either the level of efficiency is low in this market or there isn't enough competition.
Experience shows that the increased number of banks or finance companies is not sufficient to ensure better competition. A new bank is more likely to emulate the functioning of the existing banks. Alternative avenues should be made available for the small savers to park their savings and for the borrowers to borrow funds. As of today, they have nowhere else other than banks to approach. The existing stock market has very limited options for them.
Almost every bank has been focusing only in strengthening its legal department, hiring full-time lawyers as well as outside consultants while activities in marketing, credit risk analysis and monitoring the loan portfolio are still rudimentary. This naturally makes the banks' investments highly risky and the interest rate they have to charge the borrowers are bound to be high in order to cover the risks. Financing professionally managed corporates is less risky and some of them are getting bank finances at interest rates lower than the highest interest rate the banks pay on the deposits. Businessmen complaining about the high rate of interest on bank loans are either those who are on the list of bank loan defaulters or who are in the leadership of the chambers that have such defaulters in the majority.
Therefore, Nepal Rastra Bank should immediately start measures where the banks become more efficient, for example, in risk analysis and monitoring the portfolios. But these measures must be market-oriented. One such step would be issuing publicly tradable securities by NRB itself. Similarly, even private limited companies should be encouraged to borrow from the general people by issuing publicly tradable securities. The Credit Information Company (that is now limited to a blacklisting company) can be easily developed as such an agency to rate such securities.
The recent news that NRB is making all the government bonds tradable in the stock exchange signals one step in the right direction, but it is not going to be sufficient. NRB must come out more actively in the market to spur competition and make it imperative for the banks to be more efficient.
|
