Finance ministry and central bank face to face on interest rate issue

KATHMANDU: It is seen that the conflict between the finance minister and the Nepal Rastra Bank will increase again regarding interest rate on deposits. While the central bank is insisting on increasing the interest rate, the government is standing in favor of not increasing the interest rate.

Banks have increased the interest rate on deposits with effect from October 1 following the incentives provided by the central bank through monetary policy. Less than a week after the increase in deposit interest rates, Finance Minister Janardan Sharma has come to the conclusion that he will intervene in the deposit interest rates.

Speaking at the Palungtar festival in Gorkha on Wednesday, he said that production will not increase if money is kept in banks because of interest rates. He said that the government has started to reduce the interest rate.

On Thursday, while inaugurating the NADA EV show, he went a step further and said that the interest rate discussion program has been decided next week and he will reduce the interest rate. After Finance Minister Sharma made the statement that he would intervene in the interest rate, voices for and against it have started to be heard.

Officials of the central bank say that they will reduce the deposit interest rate, but it will not be possible immediately.

The Nepal Rastra Bank, which has increased the bank rate by one and a half percentage points through the monetary policy of the current fiscal year, has provided that the interest rate on immediate deposits may also be further reduced if the bank rate decreases further in the circular issued on July 18 for the implementation of the monetary policy.

The central bank had said that this arrangement was made with the desire that the deposit interest rate would also increase after the increase in the bank rate.

According to the existing regulations of the NRB, the banks have to publish the interest rate of deposits for the coming month before the beginning of the month that determines by the banks and depositor. Similarly, it has been arranged that the interest rate of deposits will change only every month.

However, if there is a change in the bank rate, then the deposit interest rate can be changed immediately based on that. When the banks have already published the interest rate for October, according to the instructions of the Rastra Bank, they can only reduce the interest rate published for mid-October. NRB officials also say that it is not positive to change the deposit interest rate within 7 days to 10 days.

However, at this time Finance Minister Sharma said that since 15 percent interest rate is available on deposits, how will they invest in productive sector? “They are arguing wrongly.”

“Is production possible in a country where you get 15 percent interest rate by keeping money in the bank? This is the problem and it should be solved,” Sharma said at the opening ceremony of the NADA EV Auto Show on Thursday. “If you put it in the bank and invest it in the land, it will double. And why use it in productive sector?”

Finance Minister Sharma’s statement has given strength to the private sector in lobbying to reduce the interest rate of loans. The umbrella organization of the private sector, including the Federation of Nepalese Chambers of Commerce and Industry, has been continuously protesting against the increase in interest rates on deposits. On Wednesday, the FNCCI issued a statement opposing the interest rate hike.

Experts in the financial sector say that even the constant pressure of the private sector may have led the economy to the conclusion that interest rates should be reduced.

Otherwise, they argue that it is wrong for a person in a position like the Finance Minister to make public comments on the subject of interest rate control determined by the market.

However, even if the finance minister wants to, it is difficult to reduce the interest rate. This is possible only if the central bank changes its policy. Experts in the financial sector argue that the Finance Minister’s interest and comments are unreasonable when the NRB is about to manage the economic challenge by raising interest rates.

Former Governor Dipendra Bahadur Chhetri calls Finance Minister Sharma’s statement baseless logic. Chhetri says that when deposits are made in the bank, financial resources are collected.

“They are saying to reduce the interest rate, even if they do what they can, but for what purpose and for what purpose, how can the interest rate be reduced?” he said, “The central bank can issue policy instructions and accordingly.” Can be implemented. Rather than the government reducing the interest rate, it comes down to the purpose of reducing it.

On the other hand, Shalikram Pokharel, financial sector adviser to the finance minister, who came to the finance ministry from the central bank, says that the finance minister is of the opinion that the interest rate should be adjusted when it is seen that the production investment cannot be made.

The minister has a clear blueprint of how to move the trade-based economy to a production-based economy. In the plan to increase production and replace imports, when the interest rate is high, it will affect the production.

However, since the character of the economy vary from country to country, sometimes it has to be controlled. It means that the central bank or the state will arrange the interest rate according to the instructions for some time.

However, Rastra Bank is in favor of not proceeding according to the wishes of the finance minister. Due to the suggestions and pressure given by bodies like the International Monetary Fund and the World Bank to increase the interest rate to control inflation, the central bank is also encouraging to increase the interest rate.

Due to this, even though the banks themselves control the interest rate by mutual agreement, the central bank has repeatedly increased the bank interest rate and the policy interest rate arguing that the interest rate should also be increased to control inflation.

Even when the central bank encouraged the banks to increase the deposit interest rate, the banks agreed not to increase the deposit interest rate in July and August. However, when the deposits from the banking system continuously decreased and the CD ratio exceeded 90 percent and the Rastra Bank took action, the competition started to give higher interest rates by violating the published interest rates.

After the complaint reached the Rastra Bank, according to the instructions of the Rashtra Bank, the banks canceled the consensus and increased the deposit interest rate for October. Banks have increased the deposit interest rates in October after the pressure of the central bank and the increase in the balance of financial resources.

However, after Finance Minister Sharma stood against it, now the Rastra Bank and the Ministry of Finance are facing each other on the issue of interest rates again.

Fiscal Nepal |
Friday September 23, 2022, 12:04:02 PM |

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