June 18: As the investable capital in the banking system has improved, the interbank interest rate has also started to drop. The interbank interest rate, which had remained stable at around 7 per cent for a long time, has gradually decreased from June.

According to Nepal Rastra Bank (NRB), the interbank interest rate dropped to 5.74 per cent on Wednesday. Prior to this, the interbank interest rate had dropped to as low as 4 per cent in mid-January to mid-February.

Back then, the interbank interest rate had decreased after the NRB injected liquidity into the market through repo. After that, it increased again and reached 8 and a half per cent in mid-February to mid-March, but it decreased recently after the liquidity crisis eased.

Although the deposits in the banks have been increasing recently, they have not been able to extend loans. Due to this, interbank transactions have decreased and interest rates are decreasing. As of Wednesday, the credit-deposit ratio (CD ratio) of banks stands at 84.19 percent which is well below the threshold of 90 percent fixed by the central bank.

As banks can provide loans by maintaining a CD ratio of up to 90 per cent, they have the ability to provide additional loans of Rs 450 billion. However, there is no demand for credit as the interest rates on loans is high and there is a slump in economic activities.

As liquidity has eased, the interest rate of the government's short-term bond -- Treasury Bills -- is gradually decreasing. On Monday, the interest rate of Treasury Bills fell to 7 per cent. After the situation eased, NRB changed the tight monetary policy and took a policy of reducing interest rates. Because of this, the base rate of banks which had reached a high point, as well as the interest rate on deposits and loans are gradually decreasing.

Commercial banks had decided to reduce the premium by 1 percentage point from mid-March to a maximum of 5 per cent. Similarly, the Nepal Bankers Association has said that as per the instructions of the NRB, the banks have to reduce the spread rate from mid-June as well, so the loan interest rate is decreasing. However, the association decided not to reduce the interest on deposit in mid-June.

The base rate of commercial banks, which reached 10.91 per cent in mid-December to mid-January, went down to 10.48 per cent in mid-April to mid-May and the interest rate on loans, which reached 13.03 per cent in mid-January to mid-February, also fell to 12.48 per cent in mid-April to mid-May.