Excess Liquidity Pushes Down Deposit Rates of Banks

Interest rates of bank deposits have continued to decline as banks and financial institutions grapple with surplus liquidity amid sluggish credit expansion.

With loan disbursement failing to keep pace with deposit collection, investible capital has piled up in the banking system, prompting most commercial banks to lower deposit rates for the month of Falgun (mid-February to mid-March).

According to notices published by commercial banks on Thursday, the maximum average deposit rate of the banks has fallen by 0.11 percentage points. Banks had offered an average interest rate of 4.68 percent on individual fixed deposits in the month of Magh (mid-January to mid-February), which has dropped to 4.57 percent for the one-month period from mid-February to mid-March.

Out of 20 commercial banks, 11 have kept their deposit rates unchanged for the review month, while nine have reduced them. Among them, Global IME Bank has cut its rate the most, by 0.75 percentage points.

As per the directive of Nepal Rastra Bank, banks and financial institutions must publish their interest rates through public notices before the beginning of each month. They are allowed to adjust interest rates by a maximum of 10 percent at a time.

The central bank also caps the spread between the maximum and minimum interest rates on domestic currency deposit accounts—except call deposits—at five percentage points. In the case of savings accounts, the difference cannot exceed two percentage points.

According to Nepal Rastra Bank, deposits at banks and financial institutions increased by 5.7 percent, or Rs 417.48 billion, to reach Rs 7,681.35 billion by mid-January of the current fiscal year 2025/26. During the same period, credit to the private sector rose by 3.6 percent, or Rs 197.47 billion, to Rs 5,695.17 billion.

Amid mounting liquidity in the market, the central bank has been mopping up excess funds through various instruments. By mid-January 2026, it absorbed Rs 1,425.50 billion through deposit collection tools, Rs 27,860.9 billion through the standing deposit facility, and Rs 200 billion through Nepal Rastra Bank bonds, totalling Rs 28,712.40 billion in liquidity absorption.

With deposit rates declining, banks’ cost of funds has fallen, leading to cheaper lending rates. According to the central bank, the average lending rate of commercial banks dropped to 7.12 percent in mid-December to mid-January of FY 2025/26, down from 8.69 percent in the corresponding month of FY 2024/25.

During the same period, the average lending rate of development banks declined to 8.34 percent from 10.10 percent, while that of finance companies fell to 9.73 percent from 11.10 percent year-on-year.

Read: Declining Interest Rates Push Institutional Depositors Toward Alternative Investments