Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU – Nepal Rastra Bank (NRB) has abolished the mandatory interest rate spread between institutional and individual fixed deposits, triggering a fresh wave of rate cuts as commercial banks scramble to manage soaring costs amid stagnant credit demand.
The central bank’s decision to remove the requirement—which previously mandated that institutional fixed deposit rates remain at least one percentage point lower than individual rates—has granted lenders unprecedented flexibility to trim deposit costs.
In immediate response to the regulatory shift, 15 commercial banks lowered their maximum deposit rates effective from Poush 1 (mid-December). While five banks maintained their current levels, the industry-wide trend signals a significant downward shift in the cost of funds.
The policy intervention arrives as the banking system grapples with an estimated Rs 11.5 trillion in excess liquidity. Despite the abundance of loanable funds, credit expansion has remained paralyzed by low investor confidence and political instability.
“Because we have not been able to grow business, we have been continuously reducing deposit rates to control costs,” stated one bank CEO. “The removal of the one-percentage-point spread has finally given us the space to manage these costs effectively.”
Under the previous regime, banks paying 3% on institutional deposits were legally bound to pay at least 4% on individual accounts. With loan demand muted, this artificial floor increased the financial burden on lenders.
The continued aggressive cutting of deposit rates has pushed Nepal’s lending environment into uncharted territory:
Bankers noted that current base rates are now at the lowest levels in Nepal’s banking history. However, Sanima Bank CEO Nishchal Raj Pandey warned that even record-low interest rates have failed to stimulate the economy. Aside from minor upticks in margin loans and home loans, major industrial and commercial sectors remain dormant.
While bankers view the move as “much-needed balm” for their balance sheets, NRB officials framed the decision as a move toward market liberalization and equity.
“Applying a one-percentage-point difference for the same tenure looked discriminatory,” an NRB official said, adding that the central bank prefers to let market forces determine the rates.
Despite the cuts, deposit rates are expected to stay above the 2.75% floor of the interest rate corridor, where the NRB continues to absorb excess liquidity through the Standing Deposit Facility (SDF).
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