Most Banks Keep Maximum Interest Rates on Fixed Deposits Steady

Most commercial banks have kept the maximum interest rate on individual fixed deposits unchanged for the month of Chaitra (mid-March to mid-April). Banks have begun holding rates steady as rates, driven by excess investable funds, are nearing the lower bound of the interest rate corridor set by Nepal Rastra Bank (NRB).

Fourteen commercial banks have kept their maximum interest rates on individual deposits unchanged compared to the month of Falgun (mid-February to mid-March). While six banks reduced their rates, the weighted average maximum interest rate on fixed deposits for commercial banks fell by a marginal 0.075 percentage points to 4.49 percent for the review month.

In mid-February to mid-March, the average maximum rate had also decreased, dropping by 0.11 percentage points. That month, 11 banks had held their deposit rates steady while nine reduced them.

Former banker Parshuram Kunwar Chhetri attributes the recent pause in the downward trend to the interest rate corridor policy implemented by the central bank.

"Without the interest rate corridor provision at this time, deposit rates would have fallen below 1 percent," he said. "The corridor ensures the NRB guarantees a minimum interest rate, so banks are now offering depositors slightly more than that floor."

As per the "Interest Rate Corridor Procedure, 2076," the upper bound of the corridor is the bank rate, and the lower bound is the deposit collection rate, designed to keep interbank interest rates within this range. To manage this, the NRB uses various monetary tools to inject or absorb liquidity.

Banks can park their excess liquidity with the NRB under the Standing Deposit Facility (SDF). However, a key provision under this tool is that banks cannot set the interest rate on all types of domestic currency savings deposits below the SDF rate.

Currently, the lower bound of the corridor (deposit collection rate) stands at 2.75 percent, while the upper bound (bank rate) is 5.75 percent.

Following NRB directives, banks must publish a public notice on the last day of each month announcing the interest rates for the upcoming month. They are permitted to adjust rates by a maximum of 10 percent at a time. Additionally, the spread between the maximum and minimum interest rates on domestic currency deposits (excluding call deposits) cannot exceed 5 percentage points, and for savings accounts, this difference cannot be more than 2 percentage points.

According to the NRB, by the end of Magh (mid-February) of the current fiscal year, banks and financial institutions had collected deposits totaling Rs 7,697.59 billion and extended loans worth Rs 5,719.54 billion. Deposit growth was recorded at 6 percent compared to Asar (mid-June to mid-July), while credit growth was only 4 percent.

With credit disbursement lagging behind deposit growth, excess liquidity has accumulated in the market. To manage this, the central bank has been absorbing funds through various instruments. By mid-February, the NRB had absorbed liquidity amounting to Rs 1,606.95 billion through deposit auctions, Rs 29,792.40 billion via the Standing Deposit Facility, and Rs 200 billion through NRB bonds.