Commercial banks of Nepal on Thursday decided to reduce their premium interest rates on loans by one percentage point effective from March 15. The decision was made by the Nepal Bankers' Association (NBA), who opted to lower the premium rate to a maximum of 5% from the current 6%. The banks have also reduced the interest rates on call and saving deposits by 0.21% and 0.42%, respectively. The decision comes as good news for small borrowers who have been struggling to repay loans due to exorbitant interest rates. The base rate surged to an average of 10.91% in mid-January, up from 8.42% in the same period last year. With an additional premium rate of 6%, the total interest rate on loans rose to as high as 17%. This has made borrowing expensive, causing a decline in demand for loans. There has also been a series of protests across the country against Bank and Financial Institutions (BFIs) against what they call the exorbitant interest rates.
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The NBA's decision to reduce premium rates is a step in the right direction to boost borrowing. The move is in line with NRB’s circular to limit premium rates on loans. The NRB has asked banks not to alter their premium rates once they have issued loans. This is because banks typically fix premium rates based on the risk assessment of the loans they issue. The new regulation will ensure that banks do not take advantage of borrowers by changing premium rates arbitrarily. The NBA's decision to reduce interest rates on call and saving deposits will also help to reduce costs for banks. In the last one month, commercial banks have collected deposits of Rs 47.46 billion from their customers, out of which 28% is in saving deposits. The reduction in the interest rate on saving deposits will help reduce the banks' costs by more than Rs 13 billion. Needless to say, low interest rates are a catalyst for the country’s economic growth. As consumers spend more, lower interest rates make them feel like they can finally afford new houses or invest in new ventures. Businesses will also enjoy the ability to finance operations, acquisitions and expansions at affordable rates, thereby increasing their future earning potential. This leads to higher stock prices. Thus, the low interest rate has a multiplier effect on the country’s overall economy.
While the NBA has not disclosed any changes to the interest rates on fixed deposits, the move to reduce premium rates and interest rates on call and saving deposits will undoubtedly lead to a reduction in lending rates. The reduction in lending rates will eventually make it more affordable for borrowers to access credit which in turn will boost investment and economic growth. Thus, the NBA's decision to reduce premium rates and interest rates on deposits is commendable. However, it is imperative that banks continue to act in the best interest of the borrowers. The reduction in interest rates should translate into more affordable loans for small borrowers who have been hit hardest by the high-interest rates. They should also ensure that they follow the NRB's guidelines on premium rates and not use them to arbitrarily exploit borrowers. As this is also likely to calm down the ongoing protest against BFIs over higher interest rates, the NBA's decision to reduce premium rates and interest rates on deposits is a positive development for borrowers. The move will make it more affordable for small borrowers to access credit, boosting investment and economic growth. However, banks should ensure that they do not exploit borrowers by arbitrarily changing premium rates. The NRB should also continue to monitor the banking sector to ensure that banks act in the best interest of the borrowers.
