BFIs Preparing to Increase Interest Rates on Loans

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BFIs Preparing to Increase Interest Rates on Loans

January 28: Banks and financial institutions (BFIs) are preparing to increase the interest rates on loans by adding a certain percentage of premium to the base rate. Since the base rate has increased in the second quarter of the current fiscal year, the interest rate on loans is also set to increase.

The average base rate of banks has increased by 1.21 percent until mid-January of the current fiscal year from 7.19 percent (mid-Jan 2021) to 8.40 percent.

After the increase in the base rate, the interest rate of the loan will automatically increase for the old borrowers and the new customers will also have to pay the new rate to receive the loan.  The interest rate of the loan changes automatically every quarter based on the base rate of the bank and financial institution.

According to the financial statements of the banks, Rastriya Banijya Bank has the lowest base rate of 6.60 percent and Civil Bank has the highest base rate of 9.74 percent.

Banks have been raising interest rates on savings since the beginning of the current fiscal year due to lack of liquidity in BFIs. Due to this, the cost of capital has increased and so has the base rate. The base rate has been limited to single digits after the Nepal Rastra Bank (NRB) intervened in the competition among BFIs to increase interest rates on deposits.

The NRB had directed BFIs to limit the interest rate to a single digit in November. Following NRB's directive, the maximum interest rate on deposits has remained below 11 percent.

NRB had implemented the base rate through the monetary policy of 2013/14 to make loan interest rate transparent and competitive. It had come into effect in commercial banks from 2013 and from 2014 in development banks and finance companies. BFIs can fix the base rate by adding 0.75 percent of their return on their cost. Banks are required to calculate the base rate on a monthly basis and submit it to the central bank within seven days of the end of the month and publish it on their website.

While publishing the base rate of interest loans, they can add a certain percent of premium on it.  According to this provision, the interest rate of the loan decreases and increases every quarter. The general public has also started bargaining on the interest rate of loans based on the base rate of the banks.




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