KATHMANDU: Over the past year, banks in Nepal have consistently decreased their interest rates on loans, with an average reduction of 2.31 percentage points. This downward trend reflects the banks' surplus of loanable funds coupled with limitations on issuing additional loans. The latest report from the Nepal Rastra Bank (NRB) revealed that the weighted lending rate of banks decreased to 10.34 percent per annum as of mid-May this year, down from 12.65 percent in the same period last year. Similarly, the base interest rate of commercial banks also declined by 1.93 percent to 8.34 percent per annum, compared to 10.27 percent last year.
Various factors, including an economic slowdown, increased non-performing assets, and concerns about capital adequacy ratios, have influenced banks' lending activities, leading to a decrease in interest rates on both deposits and loans. Commercial banks have recently reduced the interest rates on fixed deposits to a maximum of 7.06 percent for the month of mid-May and mid-June, down from an average of 7.14 percent per annum. Bankers anticipate further reductions in interest rates in the coming months, especially due to the influx of additional deposits typically observed in the final month of the fiscal year.
Sunil KC, President of the Nepal Bankers’ Association, highlighted the seasonal trend of increased deposits towards the end of the fiscal year, contributing to the downward pressure on interest rates. The Nepal Rastra Bank has implemented a policy allowing banks to adjust interest rates by up to 10 percent of the previous month's rate. Consequently, fixed deposit interest rates could potentially decrease to as low as 6.35 percent next month.
Excess liquidity in the banking system has prompted banks to deposit around Rs 1.620 trillion with the NRB. To address this surplus liquidity and sluggish lending, the NRB introduced a standing deposit facility in February, enabling banks and financial institutions to deposit excess funds with the central bank at a three percent interest rate.
In response to the misuse of subsidized loans issued during the COVID-19 pandemic, the NRB has directed banks and financial institutions to strictly adhere to its policy on loan recovery. Subsidized loans, issued in various sectors such as agriculture, education, and youth employment, amounted to Rs 140.50 billion. However, a study conducted by the NRB revealed that approximately seven percent of these loans were misused. Consequently, the NRB has cautioned banks to recover the misused funds promptly or face corrective actions.
