Share of Fixed Deposits in Banks Declining with the Drop in Interest Rates

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Share of Fixed Deposits in Banks Declining with the Drop in Interest Rates

Kathmandu: As the banks and financial institutions have started reducing the interest rates, the share of fixed deposits has also started to decrease.

After the banks reduced the interest rated with the increase in liquidity, the share of general savings started to increased and fixed deposits began to decrease.

According to Nepal Rastra Bank data, 58.9 percent of total deposits with banks and financial institutions were fixed deposits as of the Nepali month of Chaitra (mid-March to mid-April) in the current fiscal year. In the corresponding period of the previous fiscal year, 60.1 percent of total deposits were in fixed deposits.

Last year, due to a lack of liquidity in the banking system, banks raised interest rates to attract more deposits, resulting in an increased share of fixed deposits. However, since the beginning of the current fiscal year, banks have started reducing interest rates, causing the share of fixed deposits to decrease.

Bhuwan Kumar Dahal, former president of the Nepal Bankers Association, stated that banks offered higher interest rates to attract deposits during the liquidity crunch last year, emphasizing term deposits. However, with improved liquidity this year, fixed deposits are gradually decreasing. "If there is a lack of liquidity, the banks offer fixed deposit schemes with higher interest rates to attract deposits," he said.

Until the last fiscal year, banks offered high interest rates for term deposits to increase deposits. Some schemes even offered returns up to 10 times over a 21-year period. However, in the current fiscal year, increased liquidity in the banking system, due to slower credit flow compared to deposit growth, has led banks to reduce interest rates.

By mid-April of the current year, banks and financial institutions had collected a total of Rs 6,162 billion in deposits and disbursed loans amounting to Rs 5,128 billion. During this period, bank deposits increased by 7.2 percent, while credit flow increased by only 4.6 percent.

The Nepal Bankers Association decided to end the agreement to fix a uniform interest rate from mid-July this year, allowing individual banks to set their own rates. As a result, interest rates have been continuously decreasing, with most banks reducing rates from mid-April to mid-May. For the month of Jestha (mid-May to mid-June), the maximum interest rate on fixed deposits of commercial banks has dropped below 8 percent.

According to the central bank instructions, banks can offer a maximum interest rate on fixed deposits that is 5 percentage points higher than the minimum interest rate on general savings. Additionally, the difference between the maximum and minimum interest rates for all types of local currency deposit accounts, except for call deposits, cannot exceed 5 percentage points. Banks can also offer one percentage point more interest on remittance accounts compared to general term deposit accounts. According to Nepal Rastra Bank, the average interest rate on deposits of commercial banks fell to 6.53 percent in Chaitra (mid-March to mid-April), while the average interest rate on loans fell to 10.55 percent.

As interest rates on deposits have decreased, the cost of capital for banks has also reduced, causing the base rate to drop to 8.51 percent in the review month. A year ago, the base rate of commercial banks was 10.48 percent.


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