April 15: The interest rate of banks and financial institutions on loans has reached double digit, according to a report published by Nepal Rastra Bank (NRB).

The report states that the interest on loans increased due to the increase in interest on deposits as well as the increasing operational cost of the banks.

The average interest rate on loans of banks in the month of Falgun (mid-February to mid-March) was 10.5 percent, the report states adding that the interest on loans reached double digit in the month of Magh (mid-January to mid-February).

The average interest on loans was 8.48 percent during the first month of the current fiscal year. The banks were involved in an unhealthy competition of increasing the interest on deposits to attract customers following the liquidity crunch in the banking system. As a result, the interest on loans also increased.

The interest on deposits have almost doubled in the current fiscal year. According to the central bank, the average interest on deposits was 4.76 percent in the first month of the current fiscal year (mid-July to mid-August) which increased to 8.73 percent in the eighth month ie Falgun (mid-February to mid-March).

The banks were involved in an unhealthy competition of increasing interest on deposits to attract customers since mid-October to mid-November. The central bank had to intervene due to such competition among the banks. Issuing a circular on October 19, the central bank instructed the banks not to change interest rate more than 10 percent at a time.

NRB’s Deputy Spokesperson Narayan Prasad Pokharel says that the interest rate remained under control due to the central bank’s intervention.

“Had the central bank not issued such directive, the interest on loans would have reached 18 percent by now,” said Pokharel, adding, “The interest rates on deposits as well as loans remained under control due to the NRB’s intervention.”

Commercial banks are trying to keep the interest rate stable following a gentleman’s agreement among members of Nepal Bankers’ Association, an umbrella body of the CEOs of commercial banks.

The banks had decided to increase the interest on loans by 10 percent in mid-February. But the bankers agreed to maintain the same rate for at least two months.

The maximum interest on deposits at present is 11.3 percent on fixed deposits. Banks can increase the interest on fixed deposits by an additional one percentage point in case the deposit is collected through remittance.