August 19: The interest rate of loans issued by commercial banks has reached close to 12 percent. The interest on loans has increased after the banks increased interest on deposits due to liquidity crisis. As per Nepal Rastra Bank, the average interest rate on loans issued by commercial banks has reached 11.62 percent in mid-July 2022. The average interest on loans which was 8.43 percent in mid-July last year increased by 3.19 percentage points in just a year.

With lack of liquidity, banks increased the interest rate on savings to attract deposits, resulting in an increment of interest on loans as well. The average interest rate on deposit was 4.65 percent in mid-July 2021 which climbed to 7.41 percent in mid-July 2022.

After increasing the interest on savings, the base rate of banks also increased. The average base rate of commercial banks was 6.86 percent till mid-July last year. By the mid-July this  year, it climbed to 9.54 percent.

Banks fix the interest rate on loans by adding a certain percentage premium to the base rate. Due to this, when the base rate increases, the interest rate of bank loans also increases. Banks are allowed to adjust the interest rate based on the quarterly base rate.

NRB intervened after there was an unhealthy competition between banks and financial institutions to attract deposits by raising interest rates amid to lack of liquidity. Last October, when the interest rate offered by commercial banks on deposits reached 12 percent, NRB gave a verbal instruction to keep the interest rate within single digit. By issuing a written instruction on October 20, NRB introduced a provision allowing banks to change the interest rate every month by 10 percent compared to the previous month.

Prior to that, the bankers were maintaining a stable interest rate as per the gentleman’s agreement among themselves. Nepal Bankers Association, the umbrella body of chief executive officers (CEOs) of commercial banks, Development Bankers Association, the organization of CEOs of development banks, and Nepal Finance Company Association, the organization of CEOs of finance companies, increased the interest rate by 10 percent in February even though they did not increase the interest rate in December and January. Interest rate has remained same since February because there was no increase in deposits despite the increase in interest rate.

Narayan Prasad Pokharel, deputy spokesperson of NRB says that the interest rate is regulated due to the policy adopted by NRB and the discipline of banks and financial institutions. “If the competition to increase the interest rate of the banks had continued, the interest on loans would have reached 18 percent by now,” said Pokharel.

Although the NRB allowed the banks to increase the interest rate by changing the policy rate on July 3 through the revision of the Unified Directive 2078, the banks had already decided not to increase the interest rate in August as well. Anil Kumar Upadhyay, president of Nepal Bankers Association, said that since there is no possibility of increasing the deposit rate, it was decided not to increase the interest rate immediately.

Since February, banks are implementing the agreement to provide a maximum interest rate of 11.03 percent on personal deposits and 10.03 percent on institutional deposits. Similarly, the average interest rate of interbank transactions between commercial banks increased from 4.12 to 6.99 percent during the same period.