Despite repeated efforts by Nepal Rastra Bank (NRB) to prevent a sharp fall in interest rates, banks and financial institutions (BFIs) have continued lowering their base rates, citing surplus liquidity in the banking system.
Although lenders are expected to see a pickup in credit demand with the approaching general election, NRB data show that BFIs are currently struggling to expand their lending portfolios.
Over the past month, the country’s foreign trade increased significantly, with exports rising by Rs 170 billion and imports by Rs 184 billion. However, according to the central bank, BFIs have recently prioritized consumption-related loans over production-focused financing.
Economist Pushkar Bajracharya noted that election-related spending may have boosted demand for consumer and small business loans. “However, it will not significantly expand overall lending, as large investors remain in a wait-and-watch mode to rebuild confidence,” he said.
In a bid to stabilize interest rates, the NRB absorbed Rs 838 billion in excess liquidity over the past week using various monetary instruments. This move indicates that banks are holding liquidity well beyond what the central bank has already withdrawn from the system.
At present, BFIs have mobilized deposits worth Rs 7.749 trillion while extending loans totaling Rs 5.804 trillion. The credit-deposit ratio stands at 74.15 percent—well below the regulatory ceiling of 90 percent.
With abundant loanable funds available, the interbank interest rate has dropped to 2.458 percent, below the NRB’s lower policy bound of 2.75 percent.
Former NRB Executive Director Nara Bahadur Thapa remarked that the central bank’s current monetary tools appear ineffective in controlling interest rates. He suggested that the NRB should introduce longer-term monetary measures instead of relying on short-term interventions.
Meanwhile, commercial banks have reduced their deposit rates, pushing base interest rates down to as low as 4.36 percent. The base rates of Everest Bank, Nepal Bank Limited, Nabil Bank, Standard Chartered Bank Nepal, and Rastriya Banijya Bank have fallen below five percent. The continued decline in base rates is expected to further reduce lending rates in the market.
