Two weeks back, a statement from the Nepal Rastra Bank governor went largely unnoticed. He argued that banks are making a lot of money so the interest rate should perhaps be regulated. While he may have had good reasons to say this, we really need to examine what that means to the world outside in the 21st century.
A decade ago, the Rastra Bank made a landmark decision not to peg interest rates but to leave it to the market. That unleashed a plethora of banks competing with different sets of rates but it also gave the consumer the option of choosing a bank with an interest rate that seemed most agreeable. Big and low risk corporate houses got low rates and businesses borrowing from moneylenders at high interest rates could switch to bank rates that were high but half of what they paid moneylenders. Individual consumers could choose a bank that provided better interest rates.
Some businesses argue that the interest rate spread of banks is high and the central bank needs to flex its muscles to control it. Perhaps these businesses either belong to the high-risk category thereby paying the highest interest rates or are jealous of the people who have opened banks, made money and been quite successful. The Beed has observed that some businesses are paying interest rates that are three times the rate paid by some prime corporate houses. It is a true market-determined situation and if banks are making profits by risking money to high-risk customers, the central bank should not have any problem in this regard.
It would be better for the government and the central bank to work harder at regulating the functioning of the banking business than to try and disrupt fundamentals. For instance, should a set of promoters be involved in more than one financial institution? Why not start a credit rating system for banks so customers know when the deposit scheme of one bank is different from that of another? Why not make public the actual changes that have taken place in foreign managed banks and how the millions poured into these banks have actually benefited Nepali consumers? How can we encourage more foreign banks to participate in Nepal and provide strong balance sheets to fund larger projects here?
Post-1990, the banking sector has done well. It has created many Nepali millionaires in terms of stockowners with a wealth of knowledge and experience in management and operations. If so many banks are doing well, it is because management skills of Nepali professionals have excelled.
Nepal Rastra Bank should stop sending misleading signals like rolling back on interests if it still believes that foreign investment and technology transfer is the way to bring a surge in market-oriented economies. We have witnessed the impact of rollback. When the central bank clamped down on stock exchange trading with stringent regulations a decade ago, it did not realise that confidence does not bounce back, even 10 years later. That is something we surely do not want the banking industry to go through.