KATHMANDU, Jan 5: The interest rates on both deposits and loans of the banks and financial institutions (BFIs) have come down to a three-year low. Despite this situation, there has been no improvement in the demand for loans.
Since May 2024, banks have been maintaining their average base lending rate in a single digit. The BFIs have reduced their base lending rate to 7.243 percent, while a number of them have maintained it at as low as 5.53 percent.
A bank’s lending rate is determined by adding a certain premium rate to its base rate. Based on the nature of lending and risk factors, banks add a premium between 1.5 to 5 percentage points on top of the base rate when they provide loans to their clients.
Revised interest rate corridor system introduced
With the base rate into effect, the BFIs lending rate has also declined to 9.07 percent per annum. Last time, the BFIs fixed their lending rate at 9.09 percent per annum in December 2020.
Likewise, the BFIs have reduced their interest rate on personal deposits to as low as 6.18 percent after having excessive loanable funds. In December 2020, the interest rate on deposits stood at an average of 5 percent per annum, while the banks even lowered it to 4.68 percent during COVID-19 period.
The latest record with Nepal Rastra Bank (NRB) shows that the BFIs have collected deposits worth Rs 6.678 trillion, while their lending stands at Rs 5.363 trillion. The credit-deposit ratio is 79.01 percent, which is far below the NRB prescribed threshold ceiling of 90 percent.
Despite reducing the interest rates, the BFIs have been unable to increase their loan amount at present. According to bankers, they are unable to increase their loan portfolio due to low demand for loans. “BFIs are also reluctant to issue loans after the central bank tightened the noose on quality of credit, citing an increase in non-performing loans with them,” a banker told Republica.
The financial reports published by the commercial banks also show that the ratio of their NPLs stood at four percent on an average, while a number of banks have the ratio as high as 5.84 percent. In addition, due to the increased bad debts, non-banking assets have piled up at banks which they are unable to sell in the market.
Guru Prasad Paudel, executive director of NRB, said the BFIs have been unable to recover their bad debts as expected. “This is sure to increase their NPLs further in the second quarterly report,” Paudel said at a program on Friday.
