Banks and financial institutions (BFIs) have reduced interest rates on both loans and deposits over the past year, driven by sluggish economic activity and excess liquidity that has limited business expansion.
According to records maintained by Nepal Rastra Bank (NRB), the average lending rate of BFIs declined by 1.57 percentage points as of mid-January this year compared to the same period in the previous fiscal year. During the same period, the average deposit rate fell by 1.19 percentage points, showing that lending rates dropped more sharply than deposit rates.
An NRB official attributed the significant decline in lending rates largely to the interest rate corridor framework implemented by the central bank. In an effort to narrow the gap between the upper and lower limits of the corridor, the NRB revised key policy rates through the monetary policy for the current fiscal year.
As part of these revisions, the central bank lowered the ceiling of the Standing Liquidity Facility (SLF) rate to 5.75 percent from six percent, while the policy rate was reduced to 4.25 percent from 4.5 percent. BFIs that set deposit rates below the lower bound of the interest rate corridor—2.75 percent—are not eligible to access the standing deposit facility.
In addition, the NRB has been enforcing the base interest rate policy to maintain uniformity in lending rate determination across BFIs. This policy has been in place for commercial banks since 2013 and for B- and C-class financial institutions since 2014.
Under the system, BFIs set lending rates based on the quarterly average base rate. Lending rates increase as the base rate rises, with institutions allowed to add a risk premium depending on the loan’s risk profile.
NRB data show that the weighted average lending rate of commercial banks stood at 7.12 percent as of mid-January this year, while the average deposit rate was 3.56 percent. In the same period of the previous fiscal year, these rates were 8.69 percent and 4.75 percent, respectively.
Similarly, the weighted average deposit rate of development banks declined to 4.06 percent from 5.56 percent, while that of finance companies fell to 5.17 percent from 6.66 percent. Over the same period, the average lending rate of development banks dropped from 10.10 percent to 8.34 percent, and that of finance companies from 11.10 percent to 9.73 percent.
