There has been a decline in the share of fixed deposits in banks and financial institutions after the BFIs started lowering interest rates. With improved liquidity, banks have shifted focus to regular deposits instead of term deposits.

According to data from Nepal Rastra Bank, as of mid-July 2024, banks and financial institutions held deposits totaling Rs 6445 billion, with fixed deposits comprising 57.5% of the total deposits. In mid-July 2023, this share was 61.3%.

As the portion of fixed deposits declines, savings in other forms have increased. Ordinary savings accounted for 26.7% of total deposits in mid-July 2023 but rose to 30.3% in mid-July 2024.

Until two years ago, banks focused on fixed deposits to increase liquidity. However, with the easing of liquidity and the reduction in interest rates on deposits, this trend has reversed from last fiscal year. In July 2023, the Nepal Bankers' Association ended the gentlemen’s agreement on fixing a uniform deposit rate on deposits, allowing banks to set rates freely. As a result, interest rates on deposit dropped to around 5% by mid-July 2024.

Nepal Rastra Bank’s spokesperson Ramu Poudel explained that banks offer higher interest on term deposits during liquidity shortages. “When there is a liquidity crisis, banks raise long-term deposits by offering higher rates,” he said.

According to guidelines, banks can offer up to 5 percentage points more on fixed deposits than the minimum interest on ordinary savings. The difference between the maximum and minimum rates on all types of local currency deposits (except call deposits) cannot exceed 5 percentage points.

A banker stated that during liquidity shortages, fixed deposits increase as they are scattered among banks. However, with current stability in liquidity, banks do not need to offer high interest for fixed deposits.

As interest rates on deposits have fallen, interest on loans and base rates have also decreased. In FY 2022/23, the average base rate for commercial banks was 10.11%, but this dropped to 7.61% in FY 2023/24. Consequently, the average loan rate on loans of commercial banks fell from 12.24% in mid-July 2023 to 9.68% in mid-July 2024.

Meanwhile, development banks’ interest rates fell from 13.88% to 11.07%, and finance companies' rates decreased from 14.66% to 12.32%.