Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: Commercial banks in Nepal are increasingly moving toward offering loans at interest rates of around 5% as excess liquidity in the banking system continues to push deposit rates lower and reduce banks’ cost of funds.
The decline in deposit interest rates has lowered banks’ overall funding costs, resulting in a significant reduction in their base rates. With base rates falling, some commercial banks are now in a position to offer loans at close to 5% interest to eligible borrowers, depending on the premium charged over the base rate.
According to the interest rates published by commercial banks for the month of Shrawan, the average base rate of commercial banks has declined to 4.94%, down from 5.41% in Ashadh 2082.
The declining base rates indicate that the cost of borrowing could continue to ease for businesses and individuals, provided the current liquidity conditions in the banking system persist.
Among commercial banks, Standard Chartered Bank Nepal has reported the lowest base rate at 4.21%.
The bank has stated that it will charge a minimum premium of 1 percentage point over its base rate for lending. Based on this rate structure, eligible borrowers can access loans at a minimum interest rate of around 5.21%.
The bank has also set a maximum premium of up to 3.50 percentage points over the base rate. Depending on the nature of the loan, borrower profile and applicable premium, some eligible customers could therefore access financing at interest rates close to 5%.
The situation marks a significant shift in Nepal’s lending market, where borrowing costs had remained considerably higher in recent years amid tighter liquidity conditions and elevated deposit rates.
At the other end of the spectrum, Himalayan Bank currently has the highest base rate among commercial banks at 5.39%.
The bank has set a minimum premium of 2 percentage points over its base rate. As a result, its minimum lending rate stands at around 7.39%.
The difference in base rates and lending premiums among banks means that the actual interest rate available to borrowers will continue to vary depending on the bank, type of loan, borrower risk profile and the premium applicable under the respective loan agreement.
The decline in base rates has become increasingly widespread across the banking sector.
By Ashadh 2083, the base rates of eight commercial banks had fallen below 5%. This represents a significant change compared with a year earlier. In Ashadh 2082, only one commercial bank had a base rate below the 5% threshold.
The development reflects the impact of prolonged excess liquidity in the banking system, which has encouraged banks to lower deposit rates as they compete less aggressively for funds.
As deposit rates decline, banks’ cost of funds decreases. This, in turn, contributes to a reduction in their base rates and creates room for lower lending rates.
Under Nepal Rastra Bank’s provisions on base rate determination, banks and financial institutions calculate their base rates based on their cost structure and add a return of 0.75 percentage points to the applicable cost.
Banks then determine lending rates by adding a fixed premium to the base rate.
The base rate therefore serves as a key benchmark for determining the interest rate charged on loans. When the base rate declines, borrowers with loans linked to the base rate can benefit from lower interest costs, while an increase in the base rate can raise borrowing costs.
According to Nepal Rastra Bank’s directives, banks are required to provide loans based on the average base rate of the preceding three months.
The system also provides for automatic adjustment of lending rates based on changes in the average base rate during each quarter. If the average base rate declines, the applicable lending rate also falls, while an increase in the average base rate leads to a corresponding increase in the lending rate.
However, the premium rate specified in the loan agreement cannot be changed by the bank. This means that fluctuations in the base rate, rather than arbitrary changes in the premium, determine the movement of interest rates for loans linked to the base rate.
The decline in lending rates comes as Nepal’s banking system continues to maintain substantial excess liquidity.
The Nepal Rastra Bank on Wednesday absorbed Rs 100 billion from the financial system through a deposit collection instrument for a period of 83 days.
The central bank’s move to mop up liquidity indicates that the banking system continues to have more lendable funds than the level of credit demand. With banks holding substantial liquidity, competition for deposits has weakened, allowing them to reduce deposit interest rates.
Lower deposit rates have subsequently reduced banks’ funding costs and contributed to the decline in base rates.
If excess liquidity persists and credit demand does not pick up significantly, lending rates could come under further downward pressure in the coming months. This could provide relief to borrowers and potentially encourage credit expansion, investment and economic activity.
However, the extent to which lower lending rates translate into higher credit growth will depend on demand for loans, banks’ risk appetite, regulatory requirements and the broader economic outlook. For borrowers, the actual interest rate will continue to depend on the bank’s base rate, the fixed premium applicable to the specific loan product and the terms of the individual credit agreement.
Here is a clear, engaging, and easy-to-read breakdown of the base rate comparison for commercial banks in Nepal across two fiscal periods (Asar 2082 vs. Asar 2083).
Source: Information published by the respective banks.
The table below summarizes the exact percentage changes for each bank listed in the chart:
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