June 12: With the improvement of the external sector of the economy, liquidity in the banks, and easing of the tight monetary policy implemented by the Nepal Rastra Bank (NRB), the interest rates of the banks have started to decline.

NRB adopted a tight monetary policy previously due to high inflation, Covid-19 and Russia-Ukraine tensions, causing the interest rate of the banks to increase to double digits. According to NRB, the interest rate of banks reached a high point in February of the current fiscal year (FY), but has started decreasing after mid-March.

As the liquidity situation eased, the banks reduced the interest rate on deposits. As a result, interest rates on loans have become cheaper.

Apart from this, NRB also encouraged the reduction of interest rates through the review of the monetary policy.

Reviewing the monetary policy of the current fiscal year, NRB increased the bank rate by 1.5 percentage points to 8.5 percent, the policy rate from 5.5 percent to 7 percent, and the deposit collection rate from 4 percent to 5.5 percent. After the sharp criticism of the increase in interest rates, NRB announced to reduce the spread rate of banks through the first quarter review of monetary policy. Accordingly, commercial banks maintained the spread rate at 4.2 percent and development banks and finance companies at 4.8 percent from March.

From mid-June, commercial banks need to maintain a spread rate of 4 percent and development banks and finance companies need to maintain it at 4.6 percent. As the spread rate has decreased, the interest rate on loans of banks has become cheaper.

Similarly, from the half-yearly review of the monetary policy, NRB also reduced the overnight repo interest rate by 1.5 percentage points to 7 percent, reducing the cost of banks' capital that impacted the interest rates. Likewise, from the third quarter review of monetary policy, the bank rate has been reduced by 1 percentage point to 7.5 percent.

The Nepal Bankers Association (NBA) as well reduced the interest on deposits to a single digit from mid-April and reduced the loan premium to a maximum of 5 percent only, causing the interest rate to decline. President of NBA Sunil KC said, “The interest rate is decreasing due to NRB’s policy and market conditions. We will be in a very comfortable situation by mid-July.”

As the interest rate is decreasing, the bankers are expecting that the loans will be disbursed gradually. By April, deposits in banks and financial institutions increased by Rs 370.78 billion, while loans have only increased by Rs 153.17 billion.

By mid-April, remittance inflow increased by 23.4 percent and reached Rs 1051.8 billion. Similarly, the Balance of Payments is in surplus by 214.67 billion, which was at a loss of 288.5 billion last year. The total foreign exchange reserve which was equal to Rs 1215.8 billion in June 2022 increased by 20.9 percent and reached Rs 1470.33 billion in 2023.

The foreign exchange reserves are sufficient to support 11.2 months of goods imports and 9.7 months of goods and services imports.