Nepal’s commercial banks halt interest rate cuts, signal stability in Q4

KATHMANDU: Nepal’s commercial banks have frozen deposit interest rates for the last three months of fiscal year 2081/82—Magh, Falgun, and Chaitra—ending a months-long trend of reductions driven by excess liquidity.

Announcing rates for Chaitra on Thursday that match those of the prior two months, banks have made it clear the downward spiral has stopped, offering a glimpse of stability in a sector battered by economic headwinds.

For much of the year, banks had slashed rates, citing a flood of cash in the system they couldn’t lend out fast enough. A shrinking economy, rising non-performing loans, and capital pressures on some institutions choked credit growth, prompting the cuts. “We were swimming in liquidity, but demand wasn’t there,” said a senior official at NMB Bank, speaking anonymously. Now, with rates holding steady, the average deposit interest rate sits at 4.62 percent, while lending rates have settled at 8.55 percent—down from earlier peaks but no longer in freefall.

The ripple effect is evident. Lower deposit costs and base rates have dragged lending rates down, making loans cheaper for businesses and individuals. Banks argue it’s more profitable to lend at their base rate—often below 9 percent—than to park funds at Nepal Rastra Bank’s 3 percent standing deposit facility. For riskier sectors like real estate or small enterprises, they tack on a 2 percent premium, yet most loans still clock in under 9 percent, a shift from double-digit norms a year ago.

Chaitra’s rates reflect the pause. Institutional fixed deposits range from 3.5 percent to 5.6 percent, with banks stretching maturity periods to keep funds locked in longer. Individual fixed deposits offer more, from 5.5 percent to 6.6 percent, adhering to Nepal Rastra Bank’s rule that institutional rates stay 1 percentage point below individual ones. Remittance fixed deposits, a lifeline for forex inflows, must exceed individual rates by 1 percent, a mandate aimed at luring diaspora cash.

NMB Bank and NIC Asia Bank top the list, offering 6.6 percent on individual fixed deposits—the highest in the pack. Prime Commercial Bank follows at 6.25 percent, Prabhu Bank at 6.1 percent, Sanima Bank at 6.05 percent, and Kumari Bank at 6.01 percent. A cluster of heavyweights—Global IME, Machhapuchhre, Siddhartha, Everest, and Rastriya Banijya Bank—stick to 6 percent. Nepal Bank Limited, Nepal SBI, and Himalayan Bank offer 5.5 percent, while Citizens International Bank provides 5.65 percent and Agriculture Development Bank 5.51 percent.

The freeze comes after a volatile stretch. Nepal Rastra Bank data for the first seven months of 2081/82 shows private sector credit up 5.6 percent to NPR 283.46 billion ($2.12 billion USD), outpacing last year’s 4.1 percent but hardly robust. Deposits grew 3.8 percent to NPR 245.34 billion ($1.83 billion USD), down from 7.0 percent a year ago, suggesting savers are holding back. Excess liquidity, once a catalyst for rate cuts, now underpins a cautious balancing act as banks juggle growth and risk.

The halt hints at a turning point. “We’ve stopped slashing rates to see where the economy lands,” said a Prabhu Bank manager. Lending at 8.55 percent—down from peaks above 10 percent—eases pressure on borrowers, though savers earning 4.62 percent on average might grumble. In a $40 billion GDP economy craving momentum, the pause could signal banks are digging in for a longer slog rather than betting on a quick rebound.

Behind the numbers lies a deeper story. Non-performing loans, up as businesses falter, have spooked banks into tightening credit despite lower rates. Capital adequacy ratios at some institutions—required to stay above 11 percent by Nepal Rastra Bank—hover uncomfortably close to the line, curbing risk appetite. “We’re lending at cost because we can’t afford to sit on cash, but we’re not reckless,” the NMB official said. The 2 percent premium on high-risk loans reflects that caution, keeping most rates below 9 percent but limiting aggressive expansion.

For savers, the stabilized rates offer predictability but slim returns. NMB and NIC Asia’s 6.6 percent on long-term fixed deposits stand out, yet the 4.62 percent average lags inflation—pegged at 4.16 percent by Nepal Rastra Bank—eroding real gains. Banks’ push for longer maturities aims to lock in funds, a hedge against deposit growth slowing from last year’s 7.0 percent pace.

The broader economy mirrors this tepid calm. Exports surged 46.5 percent to NPR 127.20 billion ($950 million USD) in seven months, per Nepal Rastra Bank, but imports grew just 10 percent, hinting at weak domestic demand. Banks, caught between liquidity and caution, are holding the line—neither slashing rates nor chasing growth. For now, Nepal’s banking sector breathes easier, but the pause may be less a victory than a stalemate in a still-fragile recovery.