Commercial banks slash base interest rates to single digits amid excess liquidity

KATHMANDU: In response to an overflow of loanable funds, the majority of commercial banks in Nepal have taken decisive steps, lowering their base interest rates on loans to single-digit figures.

Financial reports from class ‘A’ financial institutions reveal that 17 out of 20 commercial banks have maintained their interest rates on loans below 10 percent per annum.

However, three banks—Kumari Bank, Prime Commercial Bank, and Himalayan Bank—have been hesitant to join this trend, with Himalayan Bank holding the highest base interest rate at 10.10 percent per annum.

Standard Chartered Bank Nepal Limited (SCBNL) and Rastriya Banijya Bank (RBB) have set their base interest rates at less than 8 percent per annum, with SCBNL at 7.52 percent and RBB at 7.62 percent.

For the remaining 12 commercial banks, base rates range between 8.05 percent and 9.64 percent per annum. Nepal Rastra Bank (NRB) has allowed commercial banks to charge additional premium rates based on the risk factors associated with the nature of loans.

This significant drop in interest rates follows the NRB’s relaxation measures announced during the first review of the monetary policy for 2023/24 in early December. The NRB reduced the bank rate from 7.5 percent to 7 percent and revised the policy rate to 5.5 percent from 6.5 percent.

Commercial banks, facing an imbalance between deposit collections and loans issued, have been gradually reducing interest rates on deposits over recent months. Presently, interest rates on fixed deposits in most commercial banks are below 8 percent per annum.

Agriculture Development Bank has notably reduced its interest rates on fixed deposits to 5.66 percent per annum, the lowest among all. Meanwhile, the average interest rate on saving deposits hovers around 3 percent per annum.

NRB data indicates that commercial banks collected deposits worth Rs 5.474 trillion as of last Tuesday, while their total lending stood at Rs 4.495 trillion.

With a credit-deposit ratio below the 80 percent threshold set by the central bank, excess liquidity in the banking system has driven interbank interest rates to as low as 2.40 percent.