The Ministry of Finance is expected to direct the central bank to revise the base rate calculation formula, cap premium on base rate at two per cent, instruct banks to tie-up deposit rate to inflation, and raise the loan-to-value ratio on credit intended for stock investors.
These are some of the recommendations made by a team of experts to reduce the volatility in the banking sector and the stock market. The team led by Shiva Raj Shrestha, central bank deputy governor, submitted its 58-point recommendation to Finance Minister Yubaraj Khatiwada today. The Ministry of Finance, in a statement issued today, said it would soon direct concerned authorities, including the central bank, to implement recommendations made by the team of experts to end financial and capital market volatility.
The government had formed the team of experts last week after the stock market continued to remain in red while lending rates shot up, eroding investor confidence. The team was asked to study various aspects challenging the financial stability, including volatility in the bank interest rates and fluctuations in the capital market. The team led by Shrestha has suggested short-, medium- and long-term measures to bring stability in the banking sector and the stock market.
The team has recommended that the provision of adding 0.75 percentage point as return on asset in the formula to derive the base rate be scrapped. If this recommendation is implemented, base rate, and subsequently lending rate, will fall. Base rate is the minimum rate at which banks and financial institutions can disburse credit to borrowers.
The team has also recommended that banks and financial institutions be barred from adding premium of over two per cent to the base rate while setting lending rates. Banks have been found adding a premium of up to 12.5 per cent to the base rate, prompting lending rates to shoot through the roof.
The team has also suggested that a measure be introduced mandating banks and financial institutions to tie-up their savings deposit rate to inflation to ensure depositors do not lose when parking money in banking institutions. The team has also recommended that the government raise the ceiling on loan-to-value-ratio on margin lending by 15 percentage points to 65 per cent. If this suggestion is implemented, stock investors intending to obtain loans on the back of their securities will get 65 per cent of the value of their stock as credit. Currently, loan-to-value ratio on margin lending is 50 per cent.