July 16: Commercial banks have been given the responsibility of determining the interest rate on deposits on their own after one and a half years.

As the liquidity in the financial system has eased, the Nepal Bankers' Association (NBA) has decided that the banks will be able to set their own interest rates from mid-July.

The chief executive officer of NBA, Anil Sharma said that since the banks have plenty of liquidity and the demand for loans is low, it has been decided that the banks can determine the interest rate on deposits based on the condition of the bank.

“The association had reached a gentlemen’s agreement in fixing the interest rate after unhealthy competition among banks resulted in exorbitant interest rates in the past. But now, as that the situation has eased, it has been decided that the banks will be able to set the interest rates themselves,” said Sharma. 

Nepal Rastra Bank (NRB) had issued a verbal instruction to the banks to set the interest rates within a single digit in November 2021 after the interest rate on deposits of commercial banks reached almost 12 percent due to lack of liquidity.

Issuing a formal directive, NRB then made arrangements so that the banks could increase or decrease the interest rates only by 10 percent compared to the previous month’s interest rate.

The NBA had been fixing the maximum interest rate of banks since October 2021.

It has been learnt that the banks are preparing to lower the interest rate on deposits after mid-July. Such a decision was taken as the banks have excess liquidity at present due to high deposit collection and low credit flow.

As of last Tuesday, banks and financial institutions had collected deposits of Rs 5736 billion and provided loans of Rs 4854 billion rupees.

The average credit-deposit ratio (CD ratio) of banks also fell to 81.69 percent due to non-disbursement of loans compared to deposit collection. As banks can give loans by maintaining up to 90 percent CD ratio, they still have the ability to give more than Rs 4.5 billion as loans. However, due to high interest rates and contraction in economic activity, banks have not been able to expand credit flow.