BFIs reduce lending rates to poach borrowers amid persistent liquidity glut

KATHMANDU: Nepal’s banking sector is witnessing intensifying competition as commercial banks slash lending rates to attract borrowers from rival institutions, a trend driven by a prolonged surplus of liquidity and weak credit demand across the economy.

With lending opportunities shrinking and excess funds piling up in the financial system, banks have increasingly begun offering loans at or near their base rates to lure existing borrowers away from competitors. Industry executives warn that the practice could trigger unhealthy competition within the financial sector while squeezing profitability.

According to the Nepal Rastra Bank (NRB), the country’s financial system currently holds around Rs 1.3 trillion in lendable funds. Of that amount, approximately Rs 1.093 trillion has been parked at the central bank due to a lack of credit demand. Meanwhile, loans extended to the private sector by banks and financial institutions stood at Rs 312 billion up to mid-May of the current fiscal year, around Rs 56 billion lower than during the same period last year.

The figures highlight the growing challenge of excess liquidity and subdued borrowing activity. In response, banks have shifted their focus toward attracting customers from competing institutions rather than expanding overall lending.

A chief executive officer of a commercial bank said both lenders and borrowers are attempting to reduce financing costs in the current environment.

“Credit demand remains weak, but banks must continue paying interest on incoming deposits,” the banker said. “NRB regulations require banks to maintain deposit rates above 2.75 percent, limiting room for further reductions.”

As a result, borrowers are seeking lower lending rates while banks are willing to acquire existing loans from competitors at thinner margins in order to generate at least some income from idle funds.

Commercial banks’ maximum average interest rate on individual fixed deposits for the month of Asar stands at 4.27 percent, while the average lending rate in Jestha was 6.73 percent.

Banking executives argue that the current trend of loan migration between institutions is becoming increasingly problematic. One CEO warned that aggressive competition to attract borrowers is creating additional downward pressure on lending rates.

“Banks are competing intensely to take over each other’s loan portfolios, forcing rates lower despite limited room to reduce deposit costs further,” he said. “Deposit rates have already fallen below inflation in some cases.”

Under NRB’s liquidity absorption mechanism, the central bank pays 2.75 percent interest on excess liquidity parked by banks. Financial institutions must maintain deposit rates consistent with that benchmark to remain eligible for such facilities.

Another commercial bank CEO said the growing emphasis on poaching borrowers could create imbalances across the sector.

“Many banks are focusing more on reducing interest rates to attract customers from competitors than on generating new lending opportunities,” he said. “While some institutions may gain business, others could see profitability decline.”

He added that the primary beneficiaries of the competition are likely to be industrialists and business owners who can negotiate lower borrowing costs.

Executives also note that genuine demand for new credit remains concentrated in a few sectors, particularly hydropower and hospitality.

“Most new project proposals currently involve either hydropower or hotels,” one banker said. “Outside these sectors, demand is limited. Banks are also exercising greater caution after the post-pandemic experience and are scrutinizing how loans will be utilized before approving financing.”

At the state-backed infrastructure lender, the chief executive said loan transfers are often driven by customer preferences, service quality, and pricing rather than active solicitation by banks.

“We have not aggressively taken borrowers from other banks,” he said. “However, customers sometimes seek to move their loans because of dissatisfaction, better service, or more attractive interest rates elsewhere.”

He noted that some consortium loans have shifted between institutions and discussions with prospective borrowers continue. Requests from clients to transfer loans should be viewed as normal market behavior as long as interbank relationships remain professional, he added.

Borrowers are also increasingly seeking fixed-rate financing while interest rates remain low. Fixed lending rates currently range between 7 percent and 9 percent in many cases.

“Some customers want to lock in fixed rates now,” he said. “Certain banks are reluctant to offer long-term fixed-rate facilities because rates cannot be adjusted if market conditions change. That may also be encouraging borrowers to switch institutions.”

A development bank CEO said the trend is most visible among large corporate borrowers, where even small differences in interest rates can influence lending decisions.

“In large-ticket lending, borrowers often tell banks they will move if offered lower rates,” he said. “This practice is mostly seen among commercial banks, while development banks are less affected because their average loan size is smaller.”

However, the chairman of the Nepal Bankers’ Association and CEO of Machhapuchchhre Bank, Santosh Koirala, downplayed concerns over widespread loan poaching.

He said banks are currently more focused on loan recovery and balance-sheet management as the fiscal year draws to a close.

“Credit demand remains weak, and lending activity typically slows toward the end of the fiscal year,” Koirala said. “There may be discussions between banks and customers, but I do not believe the situation has reached a level that is significantly affecting the market.”

The development underscores a broader challenge facing Nepal’s banking sector: despite abundant liquidity and historically lower borrowing costs, economic activity and private-sector investment remain too weak to absorb available funds, leaving banks competing for the same pool of existing borrowers rather than creating new lending opportunities.