April 25: The base rate of commercial banks has decreased in the third quarter of the current fiscal year (FY 2022/23). During this period, the cost of capital in banks has decreased due to the reduction in the interest rate on deposits while the base rate has also decreased after the spread rate was adjusted according to the instructions of Nepal Rastra Bank (NRB). As a result, bank loans are expected to be cheaper.

According to the unaudited financial statements published by the banks, the average base rate of commercial banks has remained at 10.53 percent in mid-March to mid-April. During the same period last year, the average base rate of banks was 9.04 percent but increased to 10.80 percent in January of the current fiscal year.

Due to the lack of liquidity, the interest rates which have been continuously increased by the banks have started to decrease since February. In mid-December to mid-January, the interest rate on deposits of commercial banks had reached as high as 12.33 percent. Since mid-April, commercial banks have kept the interest on deposit at single digit (9.99 percent).

When the industrialists began to protest against the interest rate, banks were under pressure to reduce the interest rate. The finance minister and prime minister also separately discussed the issue of reduction of interest rates with the bankers. Meanwhile, it has become easy for the banks to reduce the interest due to the ease in liquidity situation in recent times.

Through the first quarter review of the current year's monetary policy, the central bank instructed the commercial banks to maintain the spread rate at 4.2 percent from mid-March and 4 percent from mid-June. Banks reduced the interest rate to maintain the spread rate.

In order to regulate the interest rate on loans, the central bank has introduced the provision of base rate and implemented it through the monetary policy of the fiscal year 2011/12. Banks have implemented this provision since 2012 and in development banks and finance companies from 2013.

According to the basic rate determination procedure, banks and financial institutions can set the base rate by adding 0.75 percent return to their cost. Banks have to calculate the base rate monthly and submit it to the central bank within 7 days of the end of each month and publish it on the website.

Even when banks publish the interest on loan, they implement a system of adding a certain percentage premium to the base rate. According to this arrangement, there is a provision that if the average base rate of the bank decreases in every quarter, the interest on loan will automatically decrease and if it increases, it will automatically increase.

At present, commercial banks add a maximum of 5 percent premium to the base rate while determining the interest rate on loans. There is a provision that the premium specified in the loan agreement cannot be changed.