Kathmandu. Lately, there has been a debate in the banks and financial sector about the existing ‘premium system’ to determine the interest rate of loans. Banks have been lobbying with the Nepal Rastra Bank to make the current system more flexible and risk-based, saying that the current system is impractical. <\/p>\n
The central bank is currently in the process of formulating monetary policy for the next fiscal year. The monetary policy will be unveiled in a few weeks. <\/p>\n
On the other hand, the Rastra Bank had said that these provisions would be reviewed in the monetary policy of the current fiscal year. However, the bankers have started running after the system has not been implemented yet. Bankers have been urging the central bank to be flexible in the provision of premium rate fixed while approving loans through the same monetary policy. <\/p>\n
According to the current rules, the premium rate fixed while approving the loan can be reduced but not increased. Bankers claim that due to this unilateral provision, on the one hand, the banks are not able to manage their risk and on the other hand, the borrowers are not able to get the real benefit despite having sufficient liquidity in the market. <\/p>\n
The Nepal Bankers Association (NBA) has raised this issue prominently in the suggestions submitted to the Nepal Rastra Bank and in various discussions. According to the association, there is an imbalance in the banking system due to the failure to adjust the interest rate according to the condition of the borrower’s business and the fluctuation in his repayment capacity. In the current system, banks fix the interest rate by adding a certain percentage premium to the base rate. <\/p>\n
The base rate is linked to the bank’s operating expenses and cost of funds, while the premium ensures the borrower’s risk and the bank’s profit. However, banks are afraid to reduce the premium even when there is a lot of liquidity. This has a direct impact on new and old customers who want to take loans. <\/p>\n
Bankers argue that in the absence of a risk-based pricing system, the distinction between good and weak borrowers is disappearing. If a borrower pays the principal and interest on time and the risk of his business decreases, the bank may reduce his premium. However, if the business condition of the same borrower deteriorates or the quality of the loan is weak, then the bank will be able to charge additional premium for bearing the risk. <\/p>\n
As a result, banks are under more pressure on bad loan management. “It is not possible to reduce the risk when the price is not increased,” said the CEO of a bank, “As a result, there is no healthy competition in the market and the borrowers are not able to enjoy the facility of cheap interest rates.” \u2019<\/p>\n
Citing the example of international practice, especially neighboring India, bankers said that Nepal also needs a system that reflects the external benchmark or the real market situation. <\/p>\n
In India, interest rates are based on external indicators such as the repo rate. Where banks can revise the premium on the basis of risk as per the agreement. They have demanded that a similar transparent and bilateral policy is needed in Nepal as well. Banks have been pressuring the NRB to amend the current unilateral rule to allow them to increase the premium at least up to the initially agreed rate or review it depending on the nature of the risk. <\/p>\n
But another aspect of this debate is customer protection. Nepal Rastra Bank (NRB) had made strict provisions not to allow borrowers to increase the premium to protect them from the arbitrary interest rate hike of the banks. Bankers have been calling it over-regulation. <\/p>\n
According to them, such complexities in policy formulation and practical implementation slow down the overall economy. Therefore, they insist that a balanced standard should be set in such a way that it does not burden the borrower unduly and also addresses the risk of the banks. The banking sector has concluded that it is imperative to reform the premium system to make the credit market more competitive and transparent.<\/p>\n","protected":false},"excerpt":{"rendered":"
Kathmandu. Lately, there has been a debate in the banks and financial sector about the existing ‘premium system’ to determine the interest rate of loans. Banks have been lobbying with the Nepal Rastra Bank to make the current system more flexible and risk-based, saying that the current system is impractical. The central bank is currently […]<\/p>\n","protected":false},"author":16,"featured_media":242500,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[45117,45031,45159],"tags":[],"class_list":["post-304009","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bank-finance-en","category-banner-news-en","category-news-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304009","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/comments?post=304009"}],"version-history":[{"count":1,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304009\/revisions"}],"predecessor-version":[{"id":304010,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304009\/revisions\/304010"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media\/242500"}],"wp:attachment":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media?parent=304009"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/categories?post=304009"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/tags?post=304009"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}