KATHMANDU, Feb 25: Despite the multiple attempts made by Nepal Rastra Bank (NRB) to prevent interest rates from massive decline, banks and financial institutions (BFIs) have been reducing their base rates, citing the excessive liquidity with them.
Although the BFIs are expected to get respite with an increase in demand for their loans with the approaching general election, they have been struggling to increase their businesses at present, show the records with the NRB.
There was an increase in the country’s foreign trade, with export and import volume surged by Rs 170 billion and Rs 184 billion, respectively, over the past one month. According to the NRB, the BFIs have been focusing more on issuing consumption-related loans than production based credits in recent days.
Revised interest rate corridor system introduced
Economist Pushkar Bajracharya said the BFIs could have faced more demand for consumption and small businesses due to the election. “However, it will not help grow loan issuance by a larger amount as big investors are in a wait and watch situation to regain their confidence,” he added.
In an attempt to stabilize interest rates, the NRB used various monetary tools to absorb excess liquidity worth Rs 838 billion over the last one week. This clearly shows that the BFIs are having excessive liquidity beyond the amount wiped out by the central bank from the country’s banking system.
Currently, the BFIs have collected deposits of Rs 7.749 trillion while they issued loans worth Rs 5.804 trillion. The credit-deposit ratio stands at 74.15 percent, far less than the regulatory ceiling of 90 percent.
Due to the excessive amount of loanable funds with the BFIs, the interbank interest rate has come down to 2.458 percent, while the NRB has maintained the lower bound of the interest rate at 2.75 percent.
NRB’s Former Executive Director Nara Bahadur Thapa said the monetary tools used by the central bank have appeared ineffective to regulate interest rates at present. Thapa opined that the NRB needs to introduce long-term monetary measures rather than short-term types to address the problem.
Meanwhile, the base interest rate of the commercial banks has come down to as low as 4.36 percent after they reduce the interest rate of their deposits. The base rate of five banks including Everest Bank, Nepal Bank Limited, Nabil Bank, Standard Chartered Bank and Rastriya Banijya Bank has been recorded below five percent. The decline in base rate ensures further decline in the interest rate of loans.
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