“My bank informed me just a few days ago that I will now need to pay interest at the rate of an additional 2 percent,” said Himal Paudel of Shantinagar. [break]
And this was not the first time that such an interest rate hike had hit him. The latest call from the bank was the fourth in a series over the past year.
Paudel, a client of Everest Bank Limited, had taken Rs 1.2 million in home loan three years ago. The interest rate then was 8 percent and he had taken the loan only after carefully studying the interest rate and calculating whether he would be able to manage the monthly repayment installments.
“But over the period of just one year, the rate has jumped to 14.5 percent. And the impact it has had on my EMI (equal monthly installments) has seriously upset my budget and capacity to repay,” Paudel complained.
Another borrower, requesting not to be named, informed Republica that his lender - Standard Chartered Bank Limited - has notified him of a rise in interest rate by three percent.
“A rise of 0.25 or 0.5 percent would have been understandable. But no, the bank says it is 3 percent, and I´m helpless because of the loan agreement I have signed,” he said. The loan agreement gives the bank the right to adjust rates.
Taking to Republica, both bank clients noted that if the banks had predicted that the rates would change at such a sharp rate, they might have dropped the idea of building their homes with loans.
These are just a few cases of customers increasingly criticizing the banks for sudden and substantial changes in interest rates. This, they argue, greatly erodes the interest rate predictability they had enjoyed, making life for them difficult.
Worse still, bankers have already said they are announcing yet another spate of interest rate hikes from next week for longer term loans taken in the past.
According to them, this will raise interest on home and auto loans by as much as 3 percent. This means home loans will jump to as high as 19 percent, while auto loans will touch 17 percent.
Bankers argued that they have no option but to increase the rates because they have been forced to pay higher rates to mobilize deposits, particularly as their liquidity position dwindled after the Dashain festival.
“High deposit rates have raised the cost of funds. Hence, it is normal that bankers are transferring that cost to borrowers,” said Rajan Singh Bhandari, chief executive of Citizens Bank International and vice president of Nepal Bankers´ Association.
However, customers are not ready to buy this argument. “Has the increased cost hit bank profits? No. Then how fair is it to transfer the cost to customers only?” questioned Paudel.
Top bankers admit in private that most BFIs in Nepal are operating with an unjustifiably high profit growth target of 25 percent.
“Such a high growth rate was okay when business was normal and investments were flowing in rapidly. With the shrinking in business and investment, profit targets too should have been lower. But that is not the case,” said one banker.
While he tagged the situation as unprofessional and an unfair practice on the part of professional institutions, customers like Paudel, on the other hand, describe it as a lack of discipline in the sector and inefficiency at the central bank.
He said there must be specific guidelines on how much banks can increase interest rates at one go and the frequency of rises they can announce in a year.
A spokesperson at Nepal Rastra Bank (NRB), meanwhile, said that the central bank was aware of the problems customers were facing. However, he did not specifically point out the steps the central bank was taking to create a relatively predictable environment for clients.
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