KATHMANDU, Feb 6: Banks and financial institutions (BFIs) lowered interest rates on both loans and deposits over the past year as weak economic activity and excess liquidity constrained business growth.
According to records maintained by Nepal Rastra Bank (NRB), the average lending rate of BFIs fell by 1.57 percentage points as of mid-January this year compared to the same period of the previous fiscal year. Over the same period, the average deposit rate declined by 1.19 percentage points, indicating a sharper fall in lending rates than in deposit rates.
An NRB official said the significant reduction in lending rates was largely driven by the interest rate corridor framework enforced by the central bank. To narrow the gap between the upper and lower bounds of the corridor, the NRB revised key policy rates through the monetary policy for the current fiscal year.
Revised interest rate corridor system introduced
The central bank lowered the ceiling of the Standing Liquidity Facility (SLF) rate to 5.75 percent from six percent, while the policy rate was reduced to 4.25 percent from 4.5 percent. BFIs that set deposit rates below the lower bound of the interest rate corridor—2.75 percent—are not eligible to access the standing deposit facility.
In addition, the NRB has been enforcing the base interest rate policy to ensure uniformity in lending rate determination across BFIs. The base rate rule has been in effect for commercial banks since 2013 and for B- and C-class financial institutions since 2014.
Under this system, BFIs determine lending rates based on the quarterly average base rate. As the base rate rises, lending rates also increase. BFIs are allowed to add a risk premium to the base rate depending on the risk profile of the loan.
NRB data show that the weighted average lending rate of commercial banks stood at 7.12 percent as of mid-January this year, while the average deposit rate was 3.56 percent. In the same period of the previous fiscal year, commercial banks had set average lending and deposit rates at 8.69 percent and 4.75 percent, respectively.
Similarly, the weighted average deposit rate of development banks declined to 4.06 percent from 5.56 percent, while that of finance companies fell to 5.17 percent from 6.66 percent. Over the same period, the average lending rate of development banks dropped to 8.34 percent from 10.10 percent, and that of finance companies to 9.73 percent from 11.10 percent.
