The downward trend of the interest rates on deposits continued as deposit collection in the banks and financial institutions (BFIs) surpassed credit expansion last month as well.
Ten of the 20 commercial banks have reduced the interest rates on fixed deposits for individuals for Kartik, or mid-October to mid-November, according to the notices published by the respective banks. While 9 kept the deposit rates constant, same as that from mid-September to mid-October, Sanima Bank hiked it by 0.25 percentage points to 6.15 percent.
Nepal Rastra Bank (NRB) has mandated that the difference between the maximum and minimum interest rates offered on all types of local currency saving accounts, except for call deposits, cannot exceed 5 percentage points. This causes banks to lower the interest rates on savings to align with the interest rates on fixed deposits.
Himalayan Bank has made the highest cut on interest rate on fixed deposits for individuals by 0.75 percentage points, setting a maximum interest rate of 6.25 percent, down from 7 percent in mid-September to mid-October.
Machhapuchhre Bank and Agricultural Development Bank have set the highest and lowest interest rates at 7 percent and 5.75 percent, respectively.
NRB Spokesperson Ramu Poudel said that the downward trend in deposit rates has continued as banks have excess liquidity. However, Paudel added that the rates might not decline further as credit expansion has started to surge since the beginning of the current fiscal year.
According to data from NRB, deposits in BFIs increased by 0.5 percent between mid-July and mid-September this year, while credit to the private sector rose by 1.4 percent.
Private sector credit from BFIs increased by Rs 73.39 billion in the first two months of the fiscal year, compared to an increase of Rs 33.60 billion in the corresponding year.
Following increased liquidity in the banking system, NRB absorbed, on transaction basis, a total liquidity of Rs 6,695.15 billion, including Rs 424.75 billion through deposit collection auction and Rs 6,270.40 billion through standing deposit facility (SDF).
NRB mandates banks to inform the public of the interest rates applied every month via public notice on the last day of the previous month. There is also a provision that interest rates cannot be changed by more than 10 percent at once.
With the improvement in liquidity, the Nepal Bankers’ Association in the beginning of the last fiscal year, 2023/24, decided to allow banks to set the interest rates themselves, ending their gentlemen’s agreement to fix the rate on consensus. Since then, banks have been gradually reducing deposit interest rates.
The reduction in deposit rates lowers the cost of capital for banks, resulting in the reduction in interest rates on credit.
According to NRB, the average base rate of commercial banks dropped to 7.49 percent in mid-September 2024, down from 10.14 percent in the corresponding month a year ago.
Likewise, the weighted average lending rates of commercial banks, development banks and finance companies were 9.52 percent, 10.89 percent and 12.14 percent, respectively in mid-September this year, compared to 12.23 percent, 13.99 percent and 14.68 percent, respectively a year ago.