Interest Rates of Bank Loans Likely to Increase

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Interest Rates of Bank Loans Likely to Increase

September 19:  At a time when the industrialists are lobbying to reduce interest rates, it seems that the loans of banks and financial institutions will become more expensive. As the banks have increased the interest rate on deposits, it is certain that the interest rate on loans will also increase due to the increase in cost of the banks.

According to the data published by Nepal Rastra Bank, the average interest rate and base rate of deposits of commercial banks have increased in a one month period from mid-July to mid-August. In mid-June to mid-July, the average interest rate on bank deposits was 7.86 percent, but it reached 8 percent in mid-July to mid-August.

Nepal Bankers Association has removed the practice of setting interest rates and banks have started fixing the interest rates on their own from mid-June. As the competition between the banks has started, the interest rate on deposits has started increasing. Eight banks have increased the interest on deposit starting from mid-September.

Only six months ago, the interest rate of fix deposits of the commercial banks had dropped to 9.99 percent. It has now reached 11.358 percent.

According to the instructions of the central bank, the BFIs should publish the interest rate on deposits applicable every month in the previous month. However, when setting the interest rate, there is a provision that banks can increase or decrease it by only 10 percent compared to the interest rate of the previous month.

"There is a competition among banks to attract deposits,” said a CEO of one of the commercial banks.

With the increase in the interest rate of deposits, the cost of banks is certain to increase and the base rate will subsequently increase. Due to this, there is high possibility for the interest on loans to increase.

In mid-June to mid-July, the average base rate of commercial banks was 10.03 percent, but it reached 10.11 percent a month later.

Banks and financial institutions can set the base rate by adding 0.75 percent profit to the cost. Banks have to calculate the base rate monthly and submit it to the central bank within 7 days of the end of the month and publish it on the website.

Former Executive Director of Nepal Rastra Bank Trilochan Pangeni says that interest rates have increased due to the non-cooperation between the central bank and commercial banks. He commented that even though there is excess liquidity, the central bank is not mopping liquidity through the monetary instruments and the banks are also raising interest rates due to the fear of losing deposits. Therefore, the interest on loans is becoming more expensive.

Banks can determine the loan interest rate by adding a certain percentage premium to the base rate of the last 3 months. According to this arrangement, when the average base rate of the bank decreases every quarter, the interest rate of the loan automatically decreases. At present, commercial banks can add a maximum of 5 percent premium to the base rate while determining the interest on loans. However, there is a provision that the premium specified in the loan agreement cannot be changed.

According to the NRB report, the average interest on loan of banks has decreased in mid-July to mid-August compared to the previous month. The average interest on loan, which was 12.30 percent in mid-June has dropped to 12.24 percent in mid-July. Due to high interest rates, banks have been struggling to increase credit flow.

As a result, BFIs have excess liquidity of Rs 400 billion.

The average credit to deposit ratio of banks is 82.68 percent as of Saturday. Banks can provide loans by maintaining a CD ratio of up to 90 percent. As of Saturday, banks and financial institutions have a total of Rs 5726 billion deposits. The loan disbursement of banks has reached Rs 4908 billion.



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