Nepal Rastra Bank (NRB) Governor Yubaraj Khatiwada on Sunday asked banks and financial institutions not to lower interest rates on deposits as it could invite a liquidity crunch in the banking system.
Interest rates on deposits and loans have dropped sharply over the last one and a half years with banks awash in cash. The central bank has been absorbing excess cash with the deposit collection instrument, a new mechanism it introduced recently while continuing to conduct reverse repos.
Speaking at the inauguration of the corporate and main branch office of Shangri-la Development Bank at Baluwatar, the governor said that banks could able to adjust a minimum level excess liquidity. He added that NRB would not tolerate bad governance among financial institutions as this has remained a big concern for the central bank,
Stressing the need for the management and board to address risks arising from internal factors, Khatiwada said that the central bank would not tolerate risk posed by in-house anomalies. Many financial institutions have turned sick due to the practice of the management and board members using deposits in their personal projects.
Khatiwada also assured bankers that NRB would do its best to solve problems arising from genuine market phenomena like economic slowdowns and other irregularities.
With mergers and acquisitions becoming fashionable in the banking industry, Khatiwada said that consolidation had helped to lower risks from external factors.
The governor continued that development had much room for businesses particularly mid-level enterprises. “With commercial banks focusing on corporate houses and micro-finance companies going to rural areas, development banks should tap middle range financial requirements,” said Khatiwada.
Stating that the sector was largely unexploited, Khatiwada said that development banks had been able to fulfil only one-fourth of middle range banking requirements.
About two months ago, Shangri-la Development Bank merged with Bageshwori Development Bank and began integrated operations. It has collected deposits amounting to Rs 6.45 billion and provided loans amounting to Rs 5.21 billion as of last year.
Shangri-la Development Bank Chairman Surendra Bahadur Bhariju said they were open to further merger proposals with suitable financial institutions. “We will move the merger campaign forward by carrying out thorough discussions,” he added.