November 20: Banks and financial institutions (BFIs) have reduced the interest rates on deposits. As a result, the interests on bank loans have also started declining. The reduction in interest rates on deposits has lowered the base rate and operating cost of banks and therefore the interest on loans have also been revised.
According to the data of Nepal Rastra Bank (NRB), the average interest rate on loans of commercial banks has dropped to 12.11 percent in mid-September to mid-October of the current fiscal year.
The average interest on loans in mid-July to mid-August was 12.24 percent. The average base rate of commercial banks, which was 10.11 percent in mid-August, fell to 9.94 percent in mid-October. After the base rate has decreased, the interest on loans also decreased.
Meanwhile, the interest rates of development banks have increased in mid-September to mid-October compared to the one month period of mid-July to mid-August. In mid-August, the average interest rate on loans of development banks was 13.88 percent, which increased to 13.91 percent in mid-October. However, the interest rates of development banks in mid-September to mid-October is less compared to that of mid-August to mid-September.
Similarly, the average interest rate on loans of finance companies has also decreased. The average interest rate on loans of finance companies was 14.66 percent in mid-July to mid-August, which dropped to 14.61 percent in mid-September to mid-October.
Earlier, the banks had increased the interest rates on deposits due to the lack of liquidity which increased the operating cost of banks. It resulted in high interest on bank loans.
In recent times, bank deposits have been increasing due to the increase in remittance inflows and an increase in economic activities. As the banks started reducing the interest rate on deposits, the interest on loans also started to decline.
President of Nepal Bankers Association Sunil KC says that the base rate has been lowered and the banks have also reduced the premium, so the interest on loans is decreasing.
"Currently, there is not much demand for loans compared to the increase in deposits," he said, adding, "As banks have also reduced the premium to increase investment, interest on loans is declining."
According to the instructions of the Nepal Rastra Bank regarding interest rate determination, banks are allowed to increase or decrease the interest rates by 10 percent every month. Similarly, there is a provision that banks should publish the interest rate applicable for every month a day before the start of the new month.
Banks are required to pay 1 percentage point more for deposits through remittance and 2 percentage points less for institutional depositors than for individual deposits.
As of mid-November of the current fiscal year, deposits in banks and financial institutions have increased by 2.8 percent and credit flow by 2.3 percent. During the same period of the last fiscal year, deposits increased by 0.4 percent and lending increased by 1.3 percent. However, compared to the previous months, the demand for loans has started to increase, according to the report of the central bank.
According to the NRB, the interest rates on deposits and loans have started to decrease along with the base rate of banks.
As the deposit collection is higher than credit flow, the credit-deposit ratio (CD ratio) of banks has also decreased. On November 7, the average CD ratio of banks remained at 81.31 percent. According to the central bank, banks can extend credit flow by maintaining a CD ratio of up to 90 percent. So, the banks have the capacity to provide additional loans of about Rs 514 billion.