Interest rates on deposits and loans offered by banks and financial institutions (BFIs) in Nepal have fallen to a three-year low. Despite this, there has been no significant improvement in loan demand.
Since May 2024, banks have maintained their average base lending rate in single digits. The BFIs have reduced their base lending rate to 7.243 percent, with some offering rates as low as 5.53 percent. Lending rates are determined by adding a premium to the base rate, which ranges between 1.5 to 5 percentage points depending on the type of loan and associated risks. As a result, the average lending rate has declined to 9.07 percent per annum, a figure last seen in December 2020 when it was set at 9.09 percent.
Similarly, personal deposit rates have also dropped significantly. BFIs have reduced interest rates on personal deposits to as low as 6.18 percent, reflecting an excess of loanable funds. By comparison, deposit rates averaged 5 percent in December 2020 and even fell to 4.68 percent during the COVID-19 period.
According to data from Nepal Rastra Bank (NRB), BFIs have collected deposits totaling Rs 6.678 trillion, while their lending stands at Rs 5.363 trillion. This leaves a credit-deposit ratio of 79.01 percent, well below the NRB’s threshold of 90 percent.
Despite the favorable interest rates, BFIs have struggled to increase their loan disbursement. Bankers attribute this to weak demand for loans and tightened credit quality regulations enforced by the central bank. These measures were introduced in response to a rising trend in non-performing loans (NPLs).
Currently, the average NPL ratio of commercial banks stands at 4 percent, with some banks reporting ratios as high as 5.84 percent. The increase in bad debts has also led to a buildup of non-banking assets, which banks are unable to liquidate in the market.
Guru Prasad Paudel, executive director of NRB, noted that banks have been unable to recover bad debts as anticipated. He warned that NPLs are likely to rise further in the second quarterly report, exacerbating challenges for the banking sector.
