In the last month of every fiscal year, banks are usually flooded with additional deposits: Bankers

KATHMANDU, June 12: Banks have reduced their interest rates on loans by an average of 2.31 percentage points in the past one year, while it is still on a declining trend.

Having excess loanable funds at a time when they are unable to issue additional loans led the banks to successively lower their interest rates on both deposits and loans. The Current Macroeconomic and Financial Situation Report of the country unveiled by Nepal Rastra Bank (NRB) on Monday shows that the banks' weighted lending rate stood at 10.34 percent per annum as of mid-May this year. In the review month last year, it was 12.65 percent.

Likewise, the base interest rate of commercial banks has also dropped 1.93 percent to 8.34 percent per annum. Last year, the base interest rate was 10.27 percent.

The ongoing economic slowdown, increased non-performing assets of banks and issues related to capital adequacy ratio, among others, mainly affected banks’ lending in the review period. This has exerted downward pressure on interest rates on both deposits and loans.

Of late, the commercial banks have reduced the interest rate on fixed deposits to a maximum of 7.06 percent for the month of mid-May and mid-June, down from the average of 7.14 percent per annum. Bankers said they are likely to reduce the interest rate further in the next month too.

According to President of Nepal Bankers’ Association Sunil KC, banks are normally flooded with additional deposits in the last month of almost every fiscal year. “Due to this reason, the interest rate is likely to go down next month too,” he added.

The central bank has maintained the rule that the banks are permitted to alter interest rates only up to 10 percent of the rate of the previous month. Based on this provision, the interest rate on fixed deposits can come down as low as 6.35 percent next month. 

With excess liquidity, the banks in the past few months have deposited around Rs 1.620 trillion time on time at the NRB. Citing the excess liquidity with the banks and slow lending, the NRB introduced a standing deposit facility last February, under which banks and financial institutions are allowed to deposit their excess liquidity at the central bank at three percent interest rate.

Nepal Rastra Bank (NRB) has asked banks and financial institutions (BFIs) to strictly abide by its policy to recover subsidized loans issued to those borrowers who were found misusing the funds provided under special facilities.

After the COVID-19 pandemic hit the country in 2019, the NRB through the BFIs provided subsidized loans in 10 categories related to agriculture and livestock, education, youth employment and women entrepreneurship, among others. The BFIs issued loans of Rs 140.50 billion at subsidized rates of interest.

A study carried out by the NRB, however, found around seven percent of such loans were misused. The NRB board meeting in January decided to take action against the borrowers misusing the funds. Citing the anomalies, the central bank through a public notice on Tuesday has cautioned the BFIs to recover the amount or face the actions.