Declining Interest Rates Push Institutional Depositors Toward Alternative Investments

As banks and financial institutions in Nepal continue lowering interest rates on deposits, both individual and institutional depositors are increasingly exploring alternatives to traditional fixed deposits seeking better returns.

Data from Nepal Rastra Bank (NRB) shows that by mid-June of the last fiscal year, banks and financial institutions held deposits worth Rs 7 trillion, half of which were in fixed deposits. Just a year earlier, over 60 percent of deposits were locked in fixed terms. The share has since fallen as interest rates declined. For the one month period from mid-August to mid-September, commercial banks have offered a maximum of 5.57 percent interest on individual fixed deposits, down from 5.69 percent a month ago.

Institutional investors, particularly insurance companies, are feeling the strain. National Life Insurance CEO Suresh Prasad Khatri stated that 85 percent of his company’s premium collections remain in fixed deposits. Falling returns, he noted, directly impact customer bonuses. To diversify investment, National Life Insurance has bid to acquire 28 million founder shares of Himalayan Bank previously held by Pakistan’s Habib Bank, at Rs 118.88 per share. According to Khatri, Habib Bank has already accepted the offer.

The Deposit and Credit Guarantee Fund (DCGF) faces similar constraints. Its CEO, Ramesh Ghimire, explained that while declining rates demand investment diversification, current laws restrict the fund to fixed deposits in commercial banks and government bonds. The fund is lobbying for regulatory amendments.

The Nepal Insurers’ Association also expressed concern. Chairman Poshkaraj Paudel said that shrinking deposit yields have reduced income streams for insurance companies, adding pressure to seek alternative measures.

The trend reflects a broader shift in the financial system. Two years ago, liquidity shortages pushed banks to offer higher rates, driving fixed deposit growth. Since October 2023, however, ample liquidity and sluggish credit demand have led banks to cut rates.

Former president of Nepal Bankers’ Association, Bhuvan Kumar Dahal, noted that banks adjust interest rates in response to liquidity conditions. “When liquidity tightens, banks raise rates to attract deposits. With excess liquidity today, lowering rates is inevitable,” he explained.

NRB regulations cap the maximum spread between highest and lowest interest rates on domestic currency deposits (excluding call deposits) at five percentage points. Fixed deposit rates must remain at least one percentage point above savings rates, while remittance-linked fixed deposits can offer up to one percentage point more than standard fixed deposits.